December 2020

MENA economic growthengine falters – refuel orrenew?
Atradius Regional Economic Outlook

Atradius Economic ResearchNiels de Hoog

niels.hoog@atradius.com+31 (0)20 553 2407

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Key points
 The coronavirus pandemic and the related oil price slump is a double whammy for economies in the Middle East and North
Africa (MENA). While financially still highly dependent on the global oil market that has tanked, the countries have also
been diversifying towards the tourism sector, which is severely affected by the coronavirus outbreak.
 A new oil market boom that could refuel the economies may be some time away and will not last in the long-run, as theglobal energy transition gains momentum. Meanwhile, public debt overhang continues to increase and requires urgent
fiscal consolidation. Structural job losses and low capital investment could harm the region’s economic growth potential.
 It is time for the economic model to be renewed and made more sustainable via acceleration of broad-based economic
diversification efforts and a boost in technological innovation. Among stepping-stones identified in this crisis ispharmaceuticals. North African economies could also build on the ongoing shift to higher tech manufacturing andexpansion of their trade networks.
 The region’s growing interest in renewable energy projects needs to be taken to the next level, with investment inrenewable energy capacity at the core of the economic renewal process. By providing a green way to satisfy the continued
increase in local energy demand, fossil fuels could be freed up for the export market, reducing the risk of stranded assets inthe transition period.

MENA economic growth engine falters– refuel or renew?
Low on oil
Traditional MENA oil exporters have lost control over theoil price as they gradually lost market share to the US
shale industry. Despite historically deep cuts in oil
production following an agreement in April, the OPEC+
could not do more than put a shallow bottom in the market
of about USD 40-45 per barrel. The sudden ramping up ofoil production by Libya, which is exempt of the OPEC+
quotas, has been putting renewed downward pressure on
the oil price. A possible easing of sanctions on Iranian oil
exports now that Joe Biden is on his way to become thenext US president is another risk to oil supply restrictions.
Unlike the view of the International Energy Agency (IEA)
that global oil demand will continue to grow for anotherdecade, British Petroleum suggests in its Energy Outlook
2020 that oil demand may already have peaked. In any
case, the oil price is likely to remain low for a longer
period. In line with IEA’s delayed recovery scenario, we do
not expect the oil price to recover much beyond USD 60
per barrel by 2025.
Table 1.1 Real GDP growth, %
2019

2020f

2021f

Egypt

5.6

3.6

-0.7

2022f
3.2

Morocco
Qatar

2.5
0.8

-7.4
-3.0

8.0
2.8

4.0
3.5

Saudi Arabia
Tunisia

0.3
1.0

-4.0
-10.2

3.4
8.6

3.2
5.5

United Arab Emirates

1.7

-7.7

1.1

4.0

MENA

0.7

-7.0

3.6

4.0

Sources: Oxford Economics, Atradius

Fewer petrodollars to grease thewheelsOverall, after a dramatic first half of 2020, economic
activity in the region staged a cautious recovery. Readingsof forward-looking Purchasing Manager Indices in some
MENA countries returned to just above 50, the dividing
point between growth and contraction. Some countries
including Iran, Lebanon and Jordan are still coping with asurge in corona infections and have (partially) re-imposed
lockdown measures. An unprecedented overall recessionof -7.0% this year will be followed by an economic
recovery of 3.6% in 2021 and 4.0% in 2022 (table 1.1). The
non-oil sector will be the main driver of the recovery in
2021, with domestic demand picking up. Our assumptionthat the rebound will be reinforced by the oil sector in
2022 on the back of easing of the oil production cuts
imposed by OPEC+ may prove to be too optimistic. Due tothe strong interconnectedness of the oil and non-oil
sectors, a steady flow of petrodollars is required to grease
the wheels of private consumption and investment via
banking sector liquidity and government spending on jobs
and infrastructure projects. Together with the risk of aslower than expected rollout of an effective vaccine
against the spread of the coronavirus, the uncertain oil
outlook also clouds the economic recovery projections for
net fuel importing economies. Those are burdened by anincreased public debt overhang, and typically depend on
Gulf states for financial support and remittances.

Political road bumps
Political upheaval has exacerbated the current economic
downturn and will impede the economic recovery ofseveral countries in the region. In Iraq, Iran, Syria, Yemen,
Libya and Lebanon, (geo) political and social tensions run
the highest. Infrastructure in those countries is worn-out
by wars, explosions (Lebanon) or years ofunderinvestment. The agreement on a ceasefire in Libya
could pave the way for a strong reconstruction-led
recovery, while sectarian political division stands in theway of an economic rescue plan for Lebanon. In Tunisia
and Algeria, where the democratic transition is at different
stages, political uncertainty deters growth enhancing
foreign direct investment (FDI) inflows. Iran and Qatar are
still facing the consequences of respectively major US
sanctions and a regional boycott. While Qatar’s economy iswell adjusted to the status quo, with the FIFA World Cup in
2022 and major expansion of its North Field gas

Atradius Regional Report MENA – December 2020 | 1

production in 2025-28 to look forward to, Iran’s ability toinvest in the modernization of its economy depends onwhether the new US administration will end Teheran´sfinancial isolation.

In the spotlight
Saudi Arabia
Given the self-inflicted extra blow to domestic demand
via public investment cuts and a sharp VAT increase, theprojected economic contraction of 4.0% is not that deep.
Real GDP will recover by 3.4% in 2021. Pro-growthpolicies including home ownership programs,
investments in infrastructure and mega projects such as
Neom city could revive the construction sector.
Structural reforms are implemented, and the relaxationof foreign ownership limitations will facilitate foreign
investment inflows. Alongside diversification as part ofVision 2030, hydrocarbon investments will underpin
growth in the medium-term. The exodus of expats, local
skill shortages and pay mismatches are the main
challenges for developing the private sector.
UAE
In 2020, a deep recession of 7.7% is expected. The
impact of the coronavirus on top of weak oil sector
performance is large, because of the UAE’s role as aregional transhipment and tourism hub. Real GDP will
recover by just 1.1% in 2021. The postponed World Expo
will stimulate an otherwise protracted recovery of the
tourism sector that accounts for 12% of GDP. The
medium-term outlook looks more promising. The UAE is
one of the most diversified Gulf states (more than 70%
of GDP is non-oil) and one of the most attractive foreign
investment destinations, ranking 16th globally in theWorld Bank’s Ease of Doing Business report. The
country is also a pioneer among oil exporters in the
renewable energy transition.
Egypt
Egypt’s economic outperformance since the currency
devaluation in 2016 continues during this crisis. Positive
real GPD growth of 3.6% in fiscal year (FY) 2019/20 will
be followed by a minor 0.7% recession in FY2020/21.
The negative impact of the absence of tourists on theretail sector is cushioned by the substantial easing ofmonetary policy on top of low inflation. From 2022 on,real GDP growth converges to its robust pre-crisis pace.
Infrastructural projects alongside the completion of the
new capital city will boost construction. New gas finds
will expand gas exports and support Egypt’s ambition of
becoming a Mediterranean gas hub.
MoroccoFor Morocco’s steadily growing economy, the expected
7.4% contraction this year is unprecedented. The
coronavirus pandemic caused a collapse in the tourism
sector that normally contributes 12% to GDP andseverely reduced merchandise trade, because of thesimultaneous economic downturn in Europe as the main
trade partner. This all coincided with a dry spell in theimportant agricultural sector (accounting for 15% GDP
and almost 40% employment), which is prone toweather hazards. After a strong 8.0% economic reboundin 2021, growth will return to pre-crisis pace. A
protracted recovery in tourism could be offset by
expansion of trade with countries in Sub-Saharan Africa.

High financial vulnerability
Net fuel exporting MENA countries remain dependent onenergy for between 40% to 95% of their fiscal revenues andexport receipts. This is leading to unsustainable financialmacroeconomic positions. The traditionally low debt levels
are steadily rising and financial buffers no longer seem
infinitely large. Their net fuel-importing peers havealways been financially weaker and do not necessarily
benefit from the low oil price, as this reduces the inflow ofrecycled petrodollars from Gulf States via personal
remittances (5-13% of GDP), investments and financial
support.

Neighbourly support masks weaklinks
Bahrain, Oman and Algeria in particular are facing
funding challenges. Financial backing by wealthier Gulf
Cooperation Council (GCC) neighbours has so far helped tosecure international capital market access for Bahrain andOman, but external borrowing has become more costly as
their credit ratings have been downgraded deeper into subinvestment territory this year. External debt servicing
costs for both countries are well above the critical ratio of
25% of exports of goods and services. Both Bahrain andOman also had to tap into their relatively modest oil
savings, which in combination with higher debt levels has
resulted in negative sovereign net foreign asset positions.
Algeria can only hope to cover its external payments for a
few more years by its once large, but rapidly diminishingforeign reserves. The Algerian government has so far
remained reluctant to borrow externally at all, although a
new law allows it to do so. Even for the financiallystrongest fuel dependent countries like Kuwait, Saudi
Arabia, UAE, and Qatar, financial buffers are not sufficient
to maintain current living standards for coming
generations.

Dual crisis widens twin deficits
The corona/oil dual crisis has exposed liquidity issues thatare inherent to the persistent current account and budget
deficits of Jordan, Tunisia, Morocco, Egypt and Lebanon.
Multilateral financial organizations had to come to therescue of these fuel importers with limited international
reserves to support their fixed or managed currencies.
This will further lift their high public and external debt
ratios. International donors and the IMF are so far
withholding large-scale financial support to Lebanon,
pending a sound economic rescue plan, for which acredible government is a precondition.

Fiscal support on a tight budget
Financial vulnerability does not interact well with coronarelated government stimulus either. Across the region,
fiscal support of the domestic economies has not been as

Atradius Regional Report MENA – December 2020 | 2

lavish as in other emerging markets and leads to afinancial backlash nonetheless. The public debt overhang
could slow the economic recovery, as fiscal consolidation
would have to shift to overdrive in order to bring public
debt on a firm downward path. Saudi Arabia is one of thecountries in the region that took the risky step to introduce
some bitter fiscal measures in the midst of the crisis,
including a steep increase in the rate of the (just recently
introduced) VAT, from 5% to 15%. This will further slow
private consumption and could result in damaging the
growth potential of the economy via additional structural
job losses and bankruptcies.

1.1 Private sector credit, y-o-y % change
25
20
15
10
5
0
-5
Jan 18 May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20 May 20 Sep 20
Oman

Qatar

Kuwait

UAE

Sources: Macrobond, Atradius

1

8
6
4
2
0
-2
-4
-6

-8
Jan 18 May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20 May 20 Sep 20
Saudi Arabia

Oman

Qatar

Kuwait

UAE

Sources: Macrobond, Atradius

While liquidity support from MENA countries monetary
authorities compensated for the lack of fiscal space andsmaller petrodollar deposits, this has not resulted in thedesired boost to private sector lending for every country(see chart 1.1). Conventional monetary policy tools areblunted by long-standing currency pegs to the USD in
most GCC countries and Jordan. Even in Morocco, which istransitioning to more flexible exchange rates, the interest
rate cut of 75 basis points (bps) in total was cautious, inorder to avoid undue exchange rate pressure and large
capital outflows. The size of interest rate reductions is
restricted to the 150 bps by which the US Federal Reserve
funds rate was cut earlier this year. Even if the Gulf states
would be free to do so, there is not much space to easefurther anyway, as interbank interest rates are less than
100 bps removed from the zero lower bound. An
additional reason for sluggish loan growth could be thatthe limited nominal interest rate cuts have been offset byconsumer price deflation, causing real interest rates totrend up on balance (see chart 1.2). The latest monthly
figures show that consumer prices dropped by about 1.5%
to 2.5% in Qatar, UAE, Bahrain and Oman compared to lastyear. It may not be a coincidence that the two economies
with the most robust private sector credit growth – Saudi
Arabia and Kuwait – do not suffer from deflation and are
the only ones with supportive negative real interest rates.

Saudi Arabia

Nominal interbank rates deflated with the actual consumer price inflation rate

BahrainMonetary policy tools are blunt

Bahrain

1.2 Real interest rates (%)

Time to diversify
In order to reduce financial vulnerabilities, rigorous fiscal
reforms are needed, including mobilization of non-energy
revenues. However, the ability to diversify the tax basedepends on the degree of diversification of the economy.
Moreover, sticking to the current economic model basedon a (declining) hydrocarbon industry will increasingly
become a drag on potential economic growth. Anotherreason why fuel-exporting countries need to diversify
away from the one-directional energy trade is to enhance
the region’s notoriously low trade integration.
Economic diversification programs that many countries
started years ago keep having difficulty to pick-up steam
at any stage of the business cycle. This is because of anunresolved dilemma. When the oil price is very low,
pushing ahead with economic diversification is opportune,
but then there is little funding available. When the oil pricerecovers, renewed interest in hydrocarbon development
crowds out investments in non-oil sectors. So far, export
diversification attempts mainly focus on products closely
related to the petrochemical industry. For example, thelarge oil refinery that is under development in Duqm
(Oman) will be the cornerstone of the Sultanate’s new
industrial and commercial centre. The petrochemicalindustry is also considered the future backbone of
Bahrain’s industrial development, evident by multiple
expansion plans. Even in the UAE’s export portfolio, whichis the most diversified in the Gulf, carbon intensive
industries still account for more than 75%.1

Growth potential at stake
Sticking to the fuel income based economic model will
have a negative impact on potential growth throughlabour supply and capital goods. Although labour intensity
in the hydrocarbon industry is low, petrodollars used to berecycled into public jobs or state-funded construction
works. This ‘employer of last resort’ solution to theunemployment problem is becoming less affordable, while

Source: World Bank, Gulf Economic Update, December 2019

Atradius Regional Report MENA – December 2020 | 3

demographic pressures from a steadily growing working
age population are mounting across the MENA region.
Unemployment rates in many countries have reacheddouble-digit rates, peaking around 20% or above in Iraq,
Jordan, Tunisia and Lebanon. More than 15% of Saudi
nationals are jobless. On top of fuelling social tensions, allthis unused labour supply puts a break on potential
growth. GCC’s nationalist labour policies aimed at
replacing expats with local workers will not solve the local
job shortage. On the contrary, the exodus of expats will
only delay the development of the non-oil-related private
sectors. Due to the large wage differentials with the wellpaid public sector and lack of right skills, Gulf nationals
are often neither willing nor suitable to fill vacant
positions in the private sector.
Labour productivity growth, which is already moderate,
will come under further pressure given that fewer
investments will be made in the hydrocarbon industry. As
employees will have fewer capital goods to work with,
their productivity will decrease. This main driver of labour
productivity growth in the region is measured by capital
deepening (chart 1.3). The contribution of innovation
measured by Total Factor Productivity (TFP) has been
negative in many oil and gas producing countries over the
past decades. Development of high-tech sectors withpositive TFP growth through innovation is therefore ofgreat importance.
1.3 Labour productivity per employee, average % growth over
2000-2019
3
2
1
0
-1
-2
-3
-4
-5

Capital deepening

Total Factor Productivity

Labour productivity

Sources: Conference Board TED, Atradius

medium-term prospects of certain sectors. While some key
sectors head for uncertain times, others show new
promise.

Uncertain times for construction
and tourism
The construction and real estate sector used to be a leading
non-oil growth driver, and still contributes 10%-15% to the
GDP of GCC countries. However, the industry´s volatile
performance over the past couple of years has now
become more obvious, as governments cut capital
expenditure and decided to reschedule or even to stopsome major construction projects in order to free up funds
for coronavirus relief efforts. The decreased demand for
housing due to the oil price-related liquidity squeeze andan exodus of expats adds to the structural problem ofoversupply in the real estate market. Corporates andbanks also follow a more cautious approach towards theconstruction business. Mainly affected are small-sized
construction companies and subcontractors. Real estate
prices have been falling for a couple of years now,contributing to deflation. The UAE has experienced thelargest drop in housing prices of about 30% in total since2014, followed by a 25% drop in Qatar since 2015.
The expected protracted recovery of the hard-hit tourism
sector is a setback for the region’s economic
diversification efforts, as Gulf states have heavily invested
in tourism. A new airport has been opened in Oman, andthe international airports of Dubai and Bahrain haveembarked on major expansion and modernization
projects. While quarantine measures and virus testing
requirements make flights less popular for the time being,anxiety among travellers about contamination could last
even longer. Just before the coronavirus outbreak, theshares of tourism in GDP varied from 5% in Kuwait, theleast diversified GCC member, to 13% in Bahrain. Other
MENA economies such as Egypt, Jordan and Morocco arealso heavily dependent on income from tourism. Asidefrom an expected temporary boost in tourist arrivals dueto the World Expo in Dubai in 2021 and the FIFA World
Cup in Qatar in 2022, the medium-term growth potential
for this industry has become much more uncertain.

Markets for the long-haul

Promising sectors

The dual corona/oil crisis had a large negative impact onmost sectors in the non-oil economy. In its latest Regional
Outlook of October 2020, the IMF estimated that thedefault risk of corporates has doubled in general. We canconfirm that payment performance across weaker sectors
has deteriorated due to lower demand, cash flow problems
and sometimes insufficient support from banks. The
biggest quarterly contractions of activity were inwholesale & retail, transport (including aviation),
manufacturing, construction, recreational services andhospitality. Although the direct culprits are of temporary
nature (such as border closures, lockdowns and supply
chain disruptions), it prompts careful re-evaluation of theServices and goods in the areas of education, finance,
information & communication, and of course health careare the most promising stepping-stones for economic
recovery (the equally bright prospects for renewableenergy will be highlighted separately below). In its latest
regional report, the World Bank has noted Jordan as oneof the countries where the pharmaceutical sector is arising star. In the midst of the corona crisis, the production
volume of pharmaceuticals in Jordan increased by morethan 25%. Egypt remains MENA’s largest producer andconsumer of pharmaceuticals and recorded rising demand
for medical drugs during the pandemic. Althoughcurrently less buoyant, Saudi Arabia shows growth

Atradius Regional Report MENA – December 2020 | 4

potential in this area, supported by a large population,high spending per capita on medicine and rising demandfor chronic disease treatment. Recently, Riyadh passed a
new law on pharmaceuticals relaxing restrictions on
foreign ownership, which could enable Saudi’s local
pharmaceuticals production to increase by 20% in the
short-term.

1.5 Medium- and high-tech export shares (%)
50
40
30
20

Trade outlook

10

Short-term prospects for export-oriented non-oil sectors
depend on the recovery of trade partners (chart 1.4). Grossvalue added of the textile and automobile sectors in
Tunisia and Morocco decreased between 40% and 50% in
Q2 of 2020, due to the high dependence on European
markets. Global trade has only staged a frail recovery
since then, and the WTO forecast of a 7.2% rebound in 2021
is subject to a high degree of uncertainty. Medium-term
prospects depend on fuel exporters’ speed in diversifying
their export base, while some fuel importers can reap the
benefits from their gradual move-up in the global value
chain. Morocco has been upgrading its manufacturingbase to produce higher-tech products, and its automotive
industry is well positioned to benefit from theelectrification of vehicles. Tunisia’s shift from textile toelectrical equipment and parts for the car and aeronauticalindustries has been equally impressive (chart 1.5). At thesame time, both countries are strengthening their regional
trade networks. They are negotiating more inclusive free
trade agreements with the European Union, which is thedestination of about 70% of their merchandise exports.
Although trade shares with Sub-Saharan Africa arecomparatively small (2.5% and 5% respectively), the two
North African countries have started to make inroads by
joining various African trade blocks. With more than 50
signatory countries, the soon to be launched African
Continental Free Trade Area (AfCFTA) could be a major
facilitator of trade integration for the African continent.
Morocco is also expanding its banking sector deeper into
Africa.
1.4 Export volume growth, non-fuel goods (%)
forecasts

20
15
10
5
0
-5
-10
-15

2018

2019

Saudi Arabia

2020
UAE

2021
Morocco2022
Tunisia

Sources: Oxford Economics, Atradius

01999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Tunisia

MoroccoSources: UNCTAD, Atradius

Renewables in focus
Besides developing the FinTech industry, which countries
like Bahrain and the UAE are pursuing, investing in
renewable energy technology will stimulate technologicaldevelopment, investment growth and job creation. This isalso a way for energy importing countries to reduce their
exposure to oil price shocks and to decrease the politicalleverage of oil states. The Middle East is well endowedwith renewable energy sources, as its geographic locationand climate conditions are highly suitable for generating
solar and wind power. Renewable energy, excludinghydropower, still has a low 2% share in the total power
generation mix, but this is starting to change.
Raising funds for renewable energy projects is becoming
easier because of the increasing popularity of green bonds
among international investors, with Egypt being the first
MENA country to have successfully issued a USD 750
million green bond in September 2020. However,available financial means appear to not to be the mostimportant factor for realizing a greener economy. So far,the financially weaker fuel importing economies havebeen more engaged in the energy transition than mosthigher-income Gulf states, with the exception of the UAE.
1.6 Regulatory indicators for sustainable energy
UAE
Algeria
S. Arabia
Qatar
BahrainOman
KuwaitNet fuel exporters
median score = 28

Egypt
LebanonJordanMoroccoTunisia

Net fuel importers
median score = 67

0

20

40

60

Planning

Legal

Policy Support

Network

Counterp. Risk

Carbon pricing

80
Incentives

Sources: World Bank RISE, Atradius

Atradius Regional Report MENA – December 2020 | 5

The latest edition of the World Bank RISE report in 2018about indicators for sustainable energy show that Tunisia,
Morocco, Jordan and Egypt are ahead in setting in up a
clear policy framework with targets, planning andfinancial incentives to stimulate renewable energy
projects (chart 1.6). In 2018, this group of countries was
responsible for almost 75% of installed renewable energy
capacity in the Arab world (excluding hydro).2
While targets of energy importing and exporting countries
are still far apart regarding the share of renewable energy
in the total mix – an ambitious 30% for Tunisia and 52%
for Morocco compared to only 10-20% for Bahrain, Oman,
Kuwait and Qatar – energy-exporting countries have beencatching up in terms of implementation since 2018. The
IEA shows in its latest renewables report that although2020 was a bad year, fuel-exporting countries will accountfor about half of the growth in photovoltaic solar panels in

2

Source: Arab Future Energy Index 2019

the period of 2020-25.3 Saudi Arabia will also be the new
driving force behind the construction of wind farms. Thisis promising, as Saudi Arabia has the highest total energy
consumption in the region, and therefore faces the biggest
challenge in meeting its own objective of generating 30%
of its power from renewable energy sources by 2030.
While renewable energy has limited export possibilities
and therefore does not offer a replacement for the fossil
fuel based earnings model, it can be an interim solution
during the period of broad-based economic diversification.
Renewable energy can be used to satisfy the increasing
domestic demand for electricity in order to free up more
oil and gas supplies for the export market and the growing
petrochemical (downstream) industry. This would resultin a decreased need for fresh investment for thedevelopment of hydrocarbons, for which the outlook is
uncertain, with a lower risk of stranded assets.

3

Source: IEA Renewables 2020

Atradius Regional Report MENA – December 2020 | 6

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Atradius Regional Report MENA – December 2020 | 7