84445 THE WORLD BANK Office of the Chief Economist Issue 1 July 2013 HIGHLIGHTS While the focus has been on the recent change in government in Egypt, five countries in the Middle East and North Africa Region, including Egypt, Tunisia, Lebanon, Jordan and Iran are facing a growth slowdown, rising fiscal deficits and debt, and high unemployment and inflation. Continued political turmoil in Egypt and spillovers from the civil war in Syria to Jordan and Lebanon threaten to make their economic situation worse. While easing political tensions in Tunisia and post-election improvements in Iran’s international relations may help these countries, the overall macroeconomic outlook in all five countries for the rest of 2013 is grim.  Egypt. Economic growth likely slid in the second half of 2012/13—before the arrival of the new government and financial support from Gulf countries—as data show signs of a slowdown in industrial production. After a sharp rebound in the third quarter of 2011/12, growth has been on a downward slide, falling by 2 percentage points in the first half of 2012/13 compared to the second half of the previous year, mainly as a result of lower investment. Annual growth is estimated to be around 2 percent in the fiscal year (ended in June 2013) marking the third consecutive year of sluggish growth.  Tunisia. The economy recovered in 2012 as tourism related activities and FDI inflows rebounded, but the recovery lost momentum due to security concerns, following the assassination of a well-known political leader in Feb 2013. Real GDP growth fell to 2.6 percent in the first quarter of 2013, half the rate recorded in the same period in 2012. Recovery in the Euro area and Libya (Tunisia’s main trading partners) as well as easing political tensions could accelerate growth in 2014.  Lebanon. Growth has remained highly volatile due to the ongoing conflict in Syria. Lebanon’s economy has grown between 1-3 percent over the past two years, significantly slower than the 7 percent and higher rates seen during the pre-crisis period. Political and economic spillovers from the Syrian crisis continue to dampen hope for recovery in tourism, real estate and wholesale trade (key drivers of growth). Growth is projected to remain around 2 percent in 2013.  Jordan. Economic activity has remained weak due to turmoil in Egypt and spillovers from conflict in Syria. Security concerns have lowered investment flows, tourism and remittances while the government faces challenges dealing with widening twin deficits and Syrian refugees. Real GDP growth stood at 2.7 percent in 2012, about half the average growth rate recorded in the pre-crisis period. Growth is expected to pick up slightly in 2013 to above 3 percent but will remain subdued given the uncertainty about the Syrian conflict.  Iran. The June presidential elections led to the victory of reformists-backed candidate Hassan Rouhani. The new government faces serious challenges dealing with a dire economy. Growth shrunk by 2 percent in 2012 as oil production declined sharply due to international sanctions. The currency has lost more than 70 percent of its value since March 2012 and the inflation rate surpassed 34 percent in the last quarter of 2012. Economic activity will remain sluggish in 2013, with prospects of gradual improvement as the new government takes over in August. Prepared by Lili Mottaghi, with valuable comments from Manuela Ferro, Elena Ianchovichina and Christina Wood, under the guidance of Shanta Devarajan. MENA Quarterly Economic Brief EGYPT reached 13.2 percent in the first quarter of 2013, while unemployment among 20-24 year On July 3, 2013, following mass protests against olds was 42 percent. President Morsi, the military intervened and removed him from office. A temporary Real GDP growth has slowed down following a government has been set up, and steps to set a rebound in 2011/12Q3 date for new elections have been taken. 8 2.8 Nevertheless, political turmoil and uncertainty 6 continue to weigh heavily on the Egyptian 1.8 economy. Growth that rebounded in the third 4 quarter of 2011/12, slipped in the first half of 2 0.8 2012/13. Real GDP growth decelerated by 2 percentage points compared to the second half 0 of the previous year. 1 The deceleration was -0.2 -2 triggered by a fall in domestic and foreign Net FDI (US$bn, RHS) -1.2 investment as political and economic policy -4 GDP growth, percent uncertainty continued to keep investment decisions on hold. Data from the Central Bank -6 -2.2 2008/09Q3 2009/10Q3 2010/11Q3 2011/12Q3 2012/13Q3 show that total investment declined by more than 1 percent of GDP in the first half of Source: Ministry of Planning. Data for 2010/11Q3 refer to 2012/13 compared with the same period the the first three months of 2011 marking the revolution. previous year. Foreign direct investment Quarterly industrial production remains sluggish continued its downward spiral and inflows reached near zero in the second quarter of Industrial production (seasonally adjusted 2010M01=100) 115 2012/13. Consumption has been the main 110 driver of growth since the revolution. 105 100 Output in the major sectors of the economy-- 95 manufacturing, construction, trade and 90 tourism—has remained weak. Industrial 85 production (mainly manufacturing, mining and 80 utilities) that showed some signs of recovery 75 during the second quarter of 2012/13 70 decelerated in the third quarter. On a positive 2010/11Q4 2010/11Q4 2011/12Q4 2012/13Q4 note, tourism (and related activities), accounting for more than 13 percent of GDP, Quarterly unemployment rate rising showed some signs of recovery as tourist 14 arrivals increased by 20 percent in the first 13 three months of 2013 (q/q). But arrivals are estimated to remain at about 11 million in 12 2013, well below the pre-revolution level of 14 11 million visitors. 10 Unemployment rate (percent) The slowdown in economic activity led to a rise 9 in the official unemployment rate, which 8 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 1 Data are presented in Egypt’s fiscal year (July-June). Issue 1 July 2013 2 MENA Quarterly Economic Brief Egypt faces shrinking fiscal space as fiscal and Egypt’s twin deficit problem pre-dates the revolution external deficits are expected to remain 0 elevated going forward. Financing needs are -2 large, and have been accumulating over the -4 past two years, but Egypt’s twin deficit problem pre-dates the Arab Spring. Though Arab -6 countries have been partially funding the -8 balance of payments deficit--$12 billion was -10 pledged by Saudi Arabia, Kuwait and UAE Fiscal balance, % of GDP following the recent change in government-- -12 Current account balance, % of GDP financing needs have been primarily covered by -14 drawing down international reserves (which FY08/09 FY09/10 FY10/11 FY11/12 FY12/13e FY13/14p reached less than 3 months of imports in May 2013) and building up domestic debt. Official Foreign reserves and official exchange rate under data show that government domestic debt pressure by large financing needs increased by 4 percent in the third quarter of 30 International reserves, US$ bn 6.6 2012 relative to the second quarter of the same Official exchange rate (EGP/US$, RHS) year and is estimated to reach a record high of 87 percent of GDP in 2013. 25 6.3 The Egyptian Pound (EGP) weakened against 20 major currencies as the government relied 6 more on domestic banks for financing its twin 15 deficits. Official data show that, after the Central Bank’s fifth auction in June, the 10 5.7 Egyptian Pound (EGP) plunged again, reaching 2011M05 2012M01 2012M09 2013M05 7.03 Egyptian pounds to the US dollar in late June. The currency has fallen by 12 percent against the US dollar since the auctions were Domestic debt is rising as government introduced in December. The EGP has been financing needs mount weakening even further in the parallel market as well as the forward market. These auctions, Gross domestic debt % of GDP 90 together with increasing Central Bank financing 85 of the government, have kept inflation rates high. Monthly data produced by the Central 80 Agency for Public Mobilization and Statistics 75 (CAPMAS) show that the annual inflation rate 70 increased to 9 percent in May 2013 (from 8.6 65 percent the previous year). The increase in 60 inflation is comprised of increases in food and 55 accommodation & food services items. Prior to 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13p the change in government, the IMF had projected the annual inflation rate to accelerate Source: World Bank and Central Bank of Egypt. to 13.7 percent in the next fiscal year. Issue 1 July 2013 3 MENA Quarterly Economic Brief TUNISIA Growth recovery stalling due to political and The Tunisian economy rebounded in 2012. economic policy uncertainty Growth turned positive in the first quarter of 2012 reaching 4.9 percent mainly due to the Real GDP growth “base effect” following a contraction of 3.9 8 percent in the same period the previous year. 6 The economy extended its recovery to the 4 fourth quarter of 2012 on the back of a strong rebound in tourism related activities 2 (accounting for more than 7 percent of GDP) 0 and in the mining sector. Both sectors were hit -2 hard during the revolution. On the demand GDP growth (percent) side, growth was fueled by consumption -4 resulting from a rise in government spending. -6 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 But the economic recovery lost momentum in the first quarter of 2013 as FDI inflows and 350 tourism receipts were hit again by security FDI inflows declined in tourism and real estate following the 2011 revolt concerns following the assassination of a 300 in MTD political figure in February. Total FDI declined by 250 9 percent over the first two months of 2013, 200 compared to the same period of 2012. Data published by the Foreign Investment Promotion 150 Agency (FIPA) show that FDI inflows to the 100 tourism and real estate sectors fell to near zero. 50 17 1 FDI inflows also declined in the industrial and 2 0 0 services sectors but less than in the other two 2010M2 2011M2 2012M2 2013M2 sectors. On the positive side, FDI inflows to the Industries Tourism and real estate (data labled) Services Finance Energy finance sector almost tripled during this period. 70 The sharp rebound in tourism receipts in 2012 The rebound in tourist arrivals and revenues was hit again by security concerns lost momentum in the first quarter of 2013, 55 in percent following the unrest. Data published by the 40 National Office of Tunisian Tourism (ONTT) 25 show a decline of 3 percent in total receipts in the first quarter of 2013, compared with the 10 same period of the previous year. The number -5 of tourist arrivals also decreased by 3 percent Number of arrivals (percentage change -20 over the same period in previous year) bringing the total down to 923,000 from Tourism revenues (percentage change -35 940,000. The decline was largely due to fewer over the same period in previous year) visitors from Europe and Maghreb countries -50 2011M1-M3 2012M1-M3 2013M1-M3 particularly Libya. Source: Central Bank of Tunisia Issue 1 July 2013 4 MENA Quarterly Economic Brief The unemployment rate in Tunisia was high even before the revolution, hovering around 13 Unemployment rates were high among graduates percent. After the revolution and with even before the revolution weakened economic activity, unemployment increased sharply and reached 18.1 percent in 40 Unemployment is uncomfortably high among graduates in percent the first quarter of 2012 due to slow tourism 35 (tourism related activities provided 400,000 30 jobs, employing about 26 percent of workers) 25 and the return of Tunisians from Libya. 18.9 18.1 17.6 20 17 16.7 16.5 Unemployment rates have since been on a 13 15 declining trend as these two factors have started to recede. The results of the National 10 Survey on Population and Employment of the 5 first quarter of 2013 show that unemployment 0 was 16.5 percent in the first quarter of 2013, 2010 2011 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 graduates of higher education Unemployment rate down 0.2 percentage points from the fourth quarter of 2012. Among graduates with higher education, the unemployment rate was 33.2 Source: National Institute of Statistics percent, with female graduates at 45 percent compared to 22.6 percent for their male counterparts. LEBANON Lebanon’s economy is entering its third Ongoing conflict in Syria dashes hope for a growth consecutive year of sluggish growth as security recovery in Lebanon for 2013 risks arising from the ongoing Syrian conflict, 12 Real GDP growth has been on declining trend since 2011 interrupted real estate activity; slowed tourism receipts and disrupted trade routes have 10 in percent destabilized the economy. Real GDP 8 decelerated sharply from 7 percent growth in GDP growth 2010 to below 2 percent in 2011 and reached 6 Annual GDP growth below 1 percent in 2012. The slowdown has 4 continued in the first quarter of 2013 with quarter-on-quarter GDP growth declining to 1.2 2 percent from 2.6 percent in Q1 of 2012. The 0 World Bank estimates annual growth to remain 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 low, hovering around 2 percent in 2013, given -2 the current security situation. Weak economic activity is expected to raise the unemployment Source: Institute of International Finance rate above its already high level of 11 percent. Issue 1 July 2013 5 MENA Quarterly Economic Brief The real estate sector, accounting for 13 10 Building permits, a key driver of Lebanon's growth is declining percent of GDP, has contracted sharply since 5 the beginning of 2011. The slowdown in the 0 property market has been extended to the first -5 quarter of 2013 as demand from foreigners, -10 -15 particularly those from Arab countries, has not -20 yet shown signs of recovery. Due to weaker -25 demand, the number of new building permits -30 issued declined by 27 percent q/q in the first -35 quarter of 2013. The tourism sector is still weak due to security concerns. The number of tourist arrivals reached its lowest level since 2008 Building permits, % change over the same period in previous year totaling 274 thousands in the first quarter of 2013, a decline of 12.5 percent compared with Tourists from Arab countries declined the most as the same period in the previous year, largely as Syria conflict continues a result of a sharp fall in visitors from Arab countries. The number of tourists from GCC 0 countries, accounting for more than half of the -5 tourists, declined sharply as governments warned citizens against travelling to Lebanon -10 due to security reasons. -15 Weak economic activity combined with a -20 widening fiscal deficit has further constrained -25 the government’s fiscal space. The fiscal deficit Tourist arrivals, % change 2013/2012 as a percent of GDP has almost doubled since -30 Tourist arrivals from Arab countries , % change 2011 and is estimated to widen to 9.2 percent 2013/2012 -35 of GDP in 2013 (from 5.7 in 2011) due to 2013M01 2013M02 2013M03 implementation of a large fiscal stimulus - including a sizable rise in wages and salaries - Government debt is rising together with that has been in place since 2012. The international reserves while growth stalls government’s large financing needs have translated into higher public debt, which 40 Public debt is rising as government financing needs rises 76 escalated from US$70 bn in January 2012 to 39 74 over US$75 bn in December 2012. The pace of 38 Public debt , US$bn(RHS) 72 increase in public debt accelerated in the first 37 Total reserves , US$bn 36 70 quarter of 2013 compared to the same period 35 68 in the previous year, suggesting an upward 34 trend for the rest of the year. On the positive 66 33 side, the Central Bank has been maintaining 64 32 large international reserves (covering more 62 31 than 17 months of imports) which could be 30 60 used as a buffer during a downturn. 2010M01 2010M08 2011M03 2011M10 2012M05 2012M12 Source: Ministry of Finance, Banque du Liban, Central Administration of Statistics, Association of Banks in Lebanon. Issue 1 July 2013 6 MENA Quarterly Economic Brief Quarterly GDP growth slows down in 2013Q1 JORDAN 12 In Jordan, spillovers from turmoil in Syria and Real GDP growth has been on declining trend since 2011 cutbacks in energy exports from Egypt have 10 dramatically slowed economic activity. GDP 8 Quarterly GDP growth (percent) growth was 1 percent lower (q/q) in the last Annual GDP growth (percent) quarter of 2012 compared to the same period 6 the previous year. The slowdown in GDP was a 4 result of contraction in the construction sector as well as a sharp decline in value added in the 2 agriculture and mining sectors due in part to 0 the disruption of transportation through Syria. Official data for the first three months of 2013 -2 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 show GDP growth has picked up to 2.6 percent from 2.2 percent in the fourth quarter of the previous year. The economy is expected to expand by about 3 percent in 2013, in particular 1800. Tourism rebounding slowly while FDI declining 2 due to a large number of Syrian refugees 1600. contributing to consumption. But it remains 1.5 1400. well below the robust growth registered over the past decade. Private and public 1200. 1 consumption have remained the main demand- 1000. side drivers of growth over the past three years. 800. 0.5 600. Tourism, worker remittances and FDI inflows 400. 0 have been hit by the regional turmoil and cuts 2010M01 2010M07 2011M01 2011M07 2012M01 2012M07 2013M01 in energy from Egypt, from whom Jordan Tourist Arrivals (1000 Person) Foreign Direct Investment, US$bln (RHS) imports 95 percent of its energy. Data from the Department of Statistics show that buying fuel from other countries to replace Egyptian gas Central government’s public debt rising has inflated the import bill. Tourist arrivals have declined by 7 percent in the first quarter of 20000 2013 compared to the same period in 2012 and 18000 declined by 21 percent compared to Q1 2010. Workers remittances have also declined by 3 16000 and 9 percent in the last quarter of 2012 compared to the same periods in 2011 and 14000 2010, respectively. Foreign direct investment 12000 has more than halved since 2011 reaching less Central government gross domestic than half a billion dollars in 2012. The current 10000 debt, US$mln account deficit has widened in 2012 to 18 8000 percent of GDP from 7 percent in 2010. 2010M01 2010M10 2011M07 2012M04 2013M01 Source: Central Bank of Jordan Issue 1 July 2013 7 MENA Quarterly Economic Brief As a result of lower than expected grants and rising spending for hosting Syrian refugees, pressures are mounting on the government Slowdown in economic activity resulted in higher unemployment and inflation rates in 2013Q1 budget. Jordan’s large financing needs have further pushed up public debt. Recent data 14 Unemployment and inflation rates rising from the Central Bank show that public debt 12 has increased by more than 60 percent in the 10 years following the Arab Spring. The public debt 8 to GDP ratio has been rising following the 6 regional turmoil, reaching 80 percent in 2012, and is expected to surpass this figure in 2013. 4 2 Weakening economic activity and financial 0 pressures increased unemployment and 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 inflation, respectively, in the first quarter of Unemployment rate (%, compared to the same period of previous year) 2013. Inflation doubled to 7.4 percent during Inflation rate (%, compared to the same period of previous year) this period compared to the 3.6 percent registered in the first quarter of 2012. Source: Central Bank of Jordan Inflationary pressures came as a result of the sharp increase in the prices of fuel and transportation, which reflected more expensive fuels and the reform the energy subsidy system in November 2012. The unemployment rate rose to 12.8 percent in the first quarter of 2013, compared to 11.4 percent in the same quarter of 2012. The increase was greater among females, whose unemployment rate increased from 18 to 20.5 percent over the same period. IRAN The presidential elections of June 14th led to the Growth shrunk as oil production declined sharply victory of Hassan Rouhani, the only reformists- backed candidate. He will take up office in The Iranian economy shrinks as oil exports and production fall 7 August, replacing hardliner Mahmoud 6 Ahmadinejad. The president-elect has called for 5 reaching out to the international community 4 and easing tensions over its nuclear program. 3 The new government, however, faces 2 enormous challenges as it inherits a dire 1 economy. Growth contracted by an estimated 2 0 percent in 2012 as oil exports (the major source -1 -2 GDP growth, (percent) of output and revenue) and production fell -3 sharply. 2000-07 2008 2009 2010 2011 2012e 2013p Issue 1 July 2013 8 MENA Quarterly Economic Brief The contraction is largely a result of the US/EU Production fell precipitously in 2012 sanctions which primarily targeted the energy sector and the country’s ability to access the international financial system. Crude oil 110 4 production and exports, which accounted for 105 more than 70 percent of the GDP and fiscal 100 3.5 revenue, reached record lows. The IEA 95 estimates that Iran’s net oil export receipts 90 3 have declined from US$95bln in 2011 to Industrial production US$64bln in 2012, or 25 percent in one year. 85 (2010M01=100) Economic growth is expected to remain sluggish 80 Crude oil production 2.5 (mb/d, RHS) in 2013 but with prospects of gradual 75 improvement as the new government takes 70 2 2010M05 2011M05 2012M05 2013M05 over in August. Growth has remained substantially below the average of 6 percent recorded over the period of 2000-2007. The domestic currency plummeted in value in the The loss of hard currency and exclusion from open market the international banking system have 45000 disrupted trade, creating a multiple exchange 40000 rate system. Before July 6, 2013, the official 35000 exchange rate was allocated only to imports of 30000 essential goods. Non-essential goods were 25000 imported through a dual exchange rate system 20000 prevailing in parallel markets (trading and open 15000 markets). While the trading rate is determined 10000 by the Central Bank, the open market rate is set 5000 Rial/US$ (open market rate) Rial/US$ (official rate) by demand and supply. Since March 2012, the 0 Rial has lost more than 70 percent of its value in Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 the open market. Foreign reserves were drawn down by 10 percent in 2012 compared to 2011 and are expected to drop by another 5 percent Quarterly inflation rate soaring in 2013, albeit remaining at comfortable levels of about 12 months of imports. 40 35 Rising financial pressures have resulted in 30 Inflation rate (percent) soaring inflation and unemployment. Official 25 data show that inflation has been on the rise 20 since the first quarter of 2012 surpassing 34 15 percent in the last quarter of 2012. Inflation is expected to remain high at about 32 percent in 10 2013. Unemployment has increased 5 substantially due to the anemic growth in 2012. 0 Official data put the unemployment rate at 15.5 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 percent in 2012, an increase of 5 percent compared to 2010 level. The youth Source: Official sources, IMF and IEA. unemployment rate is estimated at 25 percent. Issue 1 July 2013 9