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GCC-MENA INVESTMENT

Features

Strings attached

September 2012

Gulf financing is crucial to stabilising fragile economies in the Middle East and North Africa (MENA). But how much Gulf regimes are willing and able to support their neighbours looks increasingly uncertain


by Rosamund de Sybel
rosamund@tradearabia.net

The oil importing countries of the Middle East and North Africa (MENA) are in a precarious position. Political and post-revolutionary uncertainty and chronic unemployment are being stoked by rising prices and a deteriorating global economy. Reliant on foreign inflows and remittances, but buffeted by Europe’s interminable debt crisis and lacking the reserves to revive their flagging economies, governments are coming under increasing pressure. It is a potentially explosive mix.

Last month, the long-anticipated International Monetary Fund (IMF) financing for ‘Arab Spring’ countries began to materialise, helping to diffuse potential balance-of-payments crises in Morocco and Jordan. The IMF threw a lifeline to the two kingdoms: a precautionary and liquidity line worth $6.2 billion for Morocco, and a stand-by agreement of $2 billion for Jordan.

The focus is now on Egypt’s negotiations to obtain a $3.2 billion loan to plug some of its $12 billion external funding gap. IMF managing director Christine Lagarde visited Egypt on 22 August where she announced that the IMF would send a technical team to Cairo this month to refine the details of possible financial assistance.

The credit lines for Jordan and Morocco highlight a significant shift. They mark a move away from bilateral lending from the US, European Union and Gulf Co-operation Council (GCC), says Rachel Ziemba, a director at Roubini Global Economics, a consultancy.

The loans also expose a shortfall in hoped-for Gulf financing, which Ziemba calls “insufficient, uncertain and intermittent.” Gulf assistance, though lacking in transparency, is seen as less politically sensitive than IMF financing – partly because the strings attached are believed to be less onerous than IMF conditions.

In the face of dramatic geopolitical upheavals in the Arab world, Gulf assistance was expected to be a crucial stabilising force for fragile MENA economies. Gulf dynasties reacted to upheaval in the Arab world by propping up friendly monarchies with financial and political aid. Morocco and Jordan were invited last year to join the six-member GCC, in a Saudi-led initiative.

“It is interesting that the two countries that were in accession talks with the GCC have now gotten a significant credit line from the IMF,” notes Ziemba.

“It does reflect the fact that GCC money was somewhat inconsistent and insufficient; it also reflects the desire from both these countries to also hedge their bets when it comes to financing.”

Foreign direct investment and scattered loans and grants from the Gulf did continue to flow into Jordan and Morocco throughout the Arab Spring, as tourism receipts and foreign investment dipped. However Gulf support – on both the formal and informal level – has fallen far short of original pledges.

In May 2011, leaders of the Group of Eight (G8) nations pledged $40 billion in loans to Tunisia and Egypt – $10 billion of which was to come from the Gulf, and the remainder from individual G8 nations and multilateral financial institutions. The figure was later doubled when factoring Morocco and Jordan to the list of aid recipients, with the Gulf expected to stump up around a third of the total. Another $10 billion each was promised to both Bahrain and Oman, to be delivered over ten years.

However research produced by Barclays earlier this summer showed that only around $18 billion of the more than $60 billion pledged had been disbursed over the course of 2011 and 2012.

Commentators pointed out that Jordan received almost as much foreign funding as Egypt – $4.9 billion and $5.9 billion respectively – despite the fact that Egypt’s economy is vastly bigger than that of the Hashemite Kingdom. Analysts also point out that Amman’s reforms have been largely ineffectual and cosmetic.

“Aid might be a stabilising factor in the immediate term, but I think the negative side of it is that it encourages complacency among these countries, in the sense that nothing really changes because they have no incentive to change, because they think they can always rely on the Gulf,” says Said Hirsh, Middle East economist at Capital Economics in London.

Gulf aid to Egypt has been less forthcoming than to Jordan, which analysts say is regarded as a more reliable ally. According to Barclays figures, Gulf states had given only just over $3 billion at the start of 2012, at least half of which came from Saudi Arabia. Saudi Arabia has committed $4.5 billion to Egypt since the revolution in early 2011, though it is unclear exactly how much has been delivered. Saudi is also a major shareholder in the Islamic Development Bank, which signed a $1 billion co-operation agreement with Egypt to support its food and energy sectors.

The fact that Egypt’s new president, Mohamed Mursi, a member of the powerful Muslim Brotherhood, made his first overseas trip to Saudi Arabia in July was replete with symbolism. As well as hoping to safeguard economic ties – particularly as some 1.65 million Egyptians work in Saudi Arabia and remittances are an invaluable source of foreign currency – Mursi insisted that he had no intention of “exporting the revolution,” reassuring Gulf regimes that the Brotherhood would not team up with Gulf Islamist opposition groups.

Saudi’s cash injections have helped to keep the wolf from the door. In May Riyadh transferred $1 billion to Egypt’s Central Bank, a move which was expected to give the government more time to secure an IMF loan. Egyptian and Saudi officials are said to be “coordinating” to implement the rest of a Saudi aid package which local media say includes $500 million to finance high-priority development projects, $250 million for buying petroleum products and a $200 million grant for small and medium-sized projects and industries.

“The Saudi package buys the Egyptian authorities a bit more time,” says Ziemba. “The question mark is how much of that broader package has already been granted. There is not a lot of clarity on what’s in the package, where it’s going to be delivered, and into what account. So there is something important about the IMF seal of approval both in providing liquidity and a firewall for Egypt.”

In August, Qatar also committed funds to Egypt, promising to deposit $2 billion at the Egyptian Central Bank, a move which relieved some pressure on the Egyptian pound. Egypt’s reserves are at their lowest level in seven years, and are barely enough to cover three months of imports, notes Hirsh.

Hirsh does not believe that Qatari assistance will encourage other Gulf states to provide help: “Qatari aid is unlikely to be followed by help from other Gulf countries. Egypt’s oil-rich neighbours have so far shied away from significant financial aid, preferring to drip-feed the country with enough funding to just keep it afloat. This is not enough to trigger a return of much-needed foreign capital. The latter will probably depend on Egypt’s talks with the IMF.”

IMF loans have become politically toxic in post-revolutionary Egypt, and rallying enough support to secure the loan from across the political spectrum will be difficult. Though as Roubini’s Ziemba notes, IMF money will likely be “the cheapest financing in town.”

IMF money will not replace Gulf assistance, however. For Saudi Arabia, having a reliable ally in Egypt is a key foreign policy objective, especially as Riyadh struggles to deal with trouble on its borders with Yemen and Iraq, instability in Bahrain, and an escalating conflict in Syria, where the kingdom is arming and funding rebels. The question is how much Saudi Arabia is prepared to pay for Egyptian friendship.

The relationship could also be strained by the purging of the Supreme Council of the Armed Forces (SCAF) – the powerful Egyptian generals which Riyadh had long supported – in mid-August. However, Saudi efforts to exert political leverage are likely to be implied rather than overt.

“In some countries they would be unlikely to affect political development in any case,” says Hirsh. “For example, take Egypt under the Mubarak regime – they were able to influence political events there, now they can’t do that. So they are very cautious on how they give aid in that sense.”

It is not just the willingness of Gulf states to stump up more economic support which is uncertain, but their ability to do so. Though Gulf oil exporters have benefitted from high oil prices buoyed by fears of an Israeli strike on Iran, and increased output to replace an Iranian shortfall, revenues may fall. Weak global growth, the economic storm in the Eurozone and a potentially pronounced slowdown in the Chinese economy, are threatening to push oil prices down. Hirsh says Capital Economics predicts the price for a barrel of Brent will fall to $85 by the end of the year.

With reduced output, lower oil prices and revenues, enormous fiscal spending packages, huge defence and security spending programmes – with the burden growing as the war in Syria intensifies – the willingness and ability of Gulf states to shore up their fragile neighbours is uncertain.

“They obviously need to deal with their own large fiscal packages and any impact on oil prices will affect how much aid goes to the rest of the MENA region,” says Hirsh.

Kristian Coates-Ulrichsen, a Gulf expert at the London School of Economics, argues that Gulf states will be more inward looking in the immediate future.

“GCC states are more likely to focus inward and prioritise domestic spending packages, as the effects of the Arab Spring continue,” he says. “The problem facing GCC rulers is that the welfare redistribution strategy attempted in 2011 has failed to dampen calls for reform, and this places rulers in the position of having to choose between reform and repression. Unhappily, it appears that hardline forces in each country are prioritising repression over reform, meaning that the focus of the GCC is more likely to be inward than regional over the next few years.”

Gulf regional investment may more likely take the shape of large infrastructure and energy projects, rather than budgetary transfers. However, in the near term, as Jordan is threatened by the conflict in neighboring Syria, and a lack of clarity on Egypt’s economic direction and Mubarak-era contracts, both private and state investment is likely to remain thin.

However, one hope for struggling economies is the promise of increased intra-regional remittances. Arabia Monitor, a consultancy, notes in recent research that remittance inflows across the region increased by almost six per cent in the first quarter of 2012, with the majority originating from the GCC.

It argues that remittances, along with multilateral assistance “could be vital pillars on which Egypt can rely to provide much needed relief to its balance of payments position.”

It sees “continued increases in social spending as well as infrastructure investments in the GCC should sustain the remittance inflows to Egypt to at least 2013.”

For Morocco, which has seen at least half of its 800,000 workers in Spain return over the past two years, the drop in remittances will remain pronounced as the Eurozone struggles. However for Tunisia, the stabilisation in Libya could see a sizeable proportion of Tunisian workers return, boosting remittances. And for Jordan, a decrease in political instability in the region could help to lift inflows.

“Continued growth and social spending in the GCC, Iraq, as well as Libya should increase remittance inflows into the region’s oil importers,” says Arabia Monitor.

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