Public-private dialogue on the Investment Climate

The macro-economic outlook: structural challenges for the Deauville Partnership countries

Cairo, Egypt

7 May 2012

Ania Thiemann, Senior Economist, OECD

Outline

1. The economic outlook

2. Main structural challenges

A. Job creation

B. Women’s participation in the economy

C. Integrity

3. Summary and policy recommendations

2

1. The macro-economic near-term outlook

is mixed

MENA post-crisis recovery remained behind other emerging markets

4

GDP growth, percentage change year on year, constant prices

Source: IMF, 2012. Figures for 2012 are forecasts.

-6

-4

-2

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Advanced economies Developing Asia

Latin America and the Caribbean Middle East and North Africa

Sub-Saharan Africa

Growth in MENA remained below other emerging markets in 2011

5

Source: Economist Intelligence Unit

Emerging markets will be affected by sluggish demand in OECD in 2012-13

6

Growth in 2012 in all EMs will be

constrained by sluggish OECD demand.

This will affect the Deauville Countries in

particular.

EM currencies will be sensitive to the

“risk-on”, “risk-off” trade, rallying when

investors are more tolerant of risk and

falling back when investors flock to the

US dollar.

Underlying structural factors will

increase the pressures on policy makers

as external growth from OECD will not

be a major driving force for DP export

growth.

GDP growth was constrained in 2011 by the “Arab Spring”

7

GDP growth performances were negatively affected in several economies during 2011. Tunisia and Egypt stagnated. Morocco benefited from a short-run positive effect, but structural issues remain.

-1

0

1

2

3

4

5

6

Egypt Jordan Morocco Tunisia

GDP, constant prices

2010

2011

2012

Source: IMF, 2012. Figures for 2012 are forecasts.

Government budgets are coming under strain, increasing vulnerabilities

The four Deauville Partnership countries are registering large budget deficits as a result of:

• Immediate costs of unrest in the case of Egypt, Tunisia and Jordan (economic disruptions, loss of tax revenues, security expenses, compensations)

• Increased public spending to meet demands and expectations (tax cuts, pay raises, creation of government jobs)

• High food and energy prices (subsidies)

8

-10

-8

-6

-4

-2

0

Egypt Jordan Morocco Tunisia

General Government Overall Fiscal Balance

2010

2011

2012

Source: IMF, 2012. Figures for 2012 are estimates.

FDI levels in MENA have not recovered since the international financial crisis

Start of the global financial crisis

0

100

200

300

400

500

600

700

800

900

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Bil

lio

ns

of

US

$

European Union Latin America and the Caribbean

East Asia Middle East and North Africa

9

FDI inflows to selected regions (1991-2010)

Source: UNCTAD.

FDI inflows to selected regions (1991-2010)

FDI inflows (net) 2011

10

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fo

reig

n d

ire

ct

inve

stm

en

t, n

et

infl

ow

s (

cu

rre

nt

US

D, b

n)

Egypt

Jordan

Morocco

Tunisia

Libya

Financial Crisis 2008

Transition and

changes

Source: UNCTAD 2011, OECD estimates.

Political upheaval and an uncertain outlook has taken its toll on investment flows

• FDI into Egypt fell by 93% in the first nine months of 2011

(January-September), year on year.

• In Tunisia, there was a drop of almost 30% in FDI in 2011 compared to 2010

• nearly 11.000 jobs were lost in 2011 (FIPA)

• In Jordan, FDI declined by 15% in 2011 compared to 2010 according to the Central Bank of Jordan

• Morocco saw a 25% drop in FDI in the first nine months of 2011, according to l’Office des changes.

• FDI inflows to Libya were virtually nil in 2011 according to estimates.

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2. Structural challenges may

jeopardise a return to normal in the

medium term

Group GDP billion US$ (PPP)

% MENA GDP Population in millions

% MENA population

GDP per capita US$

(PPP)

Resource poor 854.1 31.8 144.0 48.1 6 701

L. A. 536.2 19.9 111.1 37.1 5 425

L. I. 1 298 48.3 44.2 14.8 34 204

MENA 2 689 100 299.3 100 19 826

A tale of three regions

Resource poor countries

Djibouti, Egypt, Jordan, Lebanon, Mauritania,

Morocco, Tunisia and the Palestinian Territories

Resource rich, labour abundant countries (LA)

Algeria, Iraq, Syria and Yemen

Resource rich, labour importing countries (LI)

Countries in Gulf Co-operation Council (GCC) (Bahrain,

Kuwait, Oman, Qatar, Saudi Arabia and the

UAE) and Libya

13

Resource poor economies are more diversified but less competitive

14

0.00

1.00

2.00

3.00

4.00

5.00

6.00 Overall score

Institutions

Infrastructure

Macroeconomic environment

Health and primary education

Higher education and training

Goods market efficiency Labour market

efficiency

Financial market development

Tech. readiness

Market size

Business sophistication

Innovation

Resource poor Resource rich, labour abundant

Resource rich, labour importing

Value added from manufacturing and services in resource poor countries is higher than in resource rich countries. However, they register lower levels of competitiveness. The overall MENA region scores particularly low in terms of innovation.

Source: WEF

Resource poor countries account for a fraction of FDI inflows to the region

• In absolute (USD) terms, this group of countries receives only 22% of FDI, compared to 70% for resource rich, labour importing countries.

15

Resource poor

Resource rich, labour abundant

Resource rich, labour importing

MENA

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Egypt 10%

Lebanon 8%

Jordan 3%

Tunisia 2%

Morocco 2%

Saudi Arabia 44%

Qatar 9%

UAE 6%

Libya 6%

Algeria 3%

Iraq 2%

Syria 2%

Others 3%

High unemployment is a pervasive challenge that affects specific sectors of the population

16

0

5

10

15

20

25

30

35

40

45

50

P. A. Tunisia Saudi Arabia

Jordan Egypt Algeria Morocco Syria UAE Kuwait Yemen

Youth Women Educated

Unemployment among youth, women, and the educated, 2009 or most recent year for which data are available

Source: World Bank

Female labour participation rate is extremely low in the Deauville countries

17 Source: World Bank, 2010.

0

10

20

30

40

50

60

70

80

Egypt Jordan Morocco Tunisia

Labour participation rate for the Deauville countries, 2010

Labor participation rate, female (% of female population ages 15+)

Labor participation rate, male (% of male population ages 15+)

Labor participation rate, total (% of total population ages 15+)

Entrepreneurship in the MENA region is far below international levels

0.58

0.63

0.77

0.79

1.31

2.26

4.21

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Sub-Saharan Africa

Middle East & North Africa

East Asia & Pacific

South Asia

Latin America & the Caribbean

Europe & Central Asia

High income

18

New firm entry per 100 working age population, 2004-09 averages

Source: World Bank, 2010.

There is a need to continue the fight against corruption

19

Corruption Perceptions Index, 2011 (low corruption = 10)

0

1

2

3

4

5

6

7

8

9

10 Low corruption

MENA average: 3.9

Source: Transparency International, 2011.

3. The way forward – a few suggestions for

policy reform

Summary: Main consequences of the transition process

• The “Arab Awakening” disclosed severe structural economic challenges, including low competitiveness, weak business climate, lack of job opportunities.

• Growth faltered in 2011 in many MENA countries because of a mix of cyclical and structural problems, added to political and economic uncertainty.

• High youth unemployment and unrealistic expectations on speed of transition process could aggravate the situation.

• The impact on the poor is potentially acute, mostly because of food and fuel price increases, but also because of lowered short-term economic prospects.

• Domestic and foreign investment declined in 2011 because of uncertainty. Investment deals are being cancelled, postponed or in some case, relocated to perceived safer destinations.

• The financial sector is being disrupted given its high sensitivity to instability, reducing its willingness to lend.

• Fiscal deficits have widened as a result of higher public spending, rising commodity prices and reduced economic growth.

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Suggested reform measures

• Improving governance and business climates

• Promoting regional integration for market extension and diversification

• Support local economic development and job creation

• Policy support and advocacy to stimulate macro, fiscal and financial stability

• Employment generation programmes (public works, infrastructure investments, SME support, micro finance)

• Supporting the poor (direct support and broad-based growth in labour-intensive sectors)

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THANK YOU FOR YOUR ATTENTION

Ania Thiemann

Senior Economist

MENA-OECD Investment Programme

Ania.Thiemann@oecd.org

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