Cash stimulus is a better recipe than austerity

Shailesh Dash
The MENA region is swiftly presenting itself as a viable and safe investment destination and things are looking decidedly brighter, according to the latest report titled, “MENA Stimulus: The Great Cash Escape” by DIFC-based asset management firm Al Masah Capital.

As European and American policymakers formulate another round of stimulus measures to ward off another dip in global economic output, MENA countries and their stimulus packages provide a case study in how cash injection, rather than austerity, may be the best answer.

Raising budgets in 2009 and implementing countercyclical fiscal measures have stood the countries of the MENA region in good stead. In the aftermath of the financial crisis these measures have propelled a tangible growth and such stimulus packages are now paying off.

The region is expected to record a real GDP growth of 4.2% this year following surpluses recorded in 2010 and 2011, according to the report. The GCC, in particular, is making a very strong showing and with recovery in oil prices, it has been able to register solid fiscal surpluses despite heavy public spending. In 2012, the IMF projects GCC to post a fiscal surplus of 15.3% in its GDP. This is all good news and justifies the measures taken in 2009.
Although the better part of the last decade showed a marked upswing in growth in the MENA region it was hit equally hard by the global financial crisis of 2008 and the fallout from the eruption of the Arab Spring. Until then the robust growth rate had been on the plus side of 5% annually with healthy current account and fiscal surpluses.

“When the financial storm hit regional shores the bruising resulted in falling bank assets, bad loans and limited liquidity with key non oil sector activities posting a visible slowdown,” Shailesh Dash of Al Masah Capital, said.

In the first storm, exports and investments to and from Europe were adversely affected. Even as it tried to stem the rot, the string of surpluses snapped in 2009 and MENA recorded a deficit of 2.3%. The uncertainty that came with the Arab Spring added to the pressure as Libya, Egypt, Yemen, and Tunisia fell into the throes of a political renaissance and the powerful visuals of public unrest impacted MENA’s image as a ‘do business’ region.
The region looked inward and set off a slew of incentive packages. Saudi Arabia announced $126.7 billion expenditure budget in 2009, allocating nearly $46.5 billion toward social projects involving education and healthcare. This was backed by another $400 billion economic package intended to be utilized over 2009–14 with the express idea of creating infrastructure and generating new employment opportunities. The UAE also stayed on course with its steady expansionary fiscal policy stressing infrastructure and social sector development. Kuwait, meanwhile, announced $5.2 billion economic stimulus package in the same year to bail out its struggling banks and investment firms. The GCC, as an entity, promised Oman and Bahrain an economic aid package of $10 billion each to be invested in infrastructure, education, and healthcare. Outside GCC, Egypt announced three fiscal stimulus measures between 2008 and 2010 that totaled $6.2 billion. Together the MENA countries held each other up and held on as the crisis abated.
“Today, these steps are showing that they were pragmatic and sensible and the consequences of their implementation can be quantified,” Dash, added.

Most vitally, they aided oil-dependent countries to diversify their economies by building non-oil infrastructure such as roads, ports, airports, and power plants. In Saudi and UAE, for example, human resource development accounted for 25% of the allocation toward social projects which then led to a jump in employment opportunities.

As a result, MENA countries recorded a growth rate of 2.7% in 2009 even as European economies came under the cost with a steep drop of 4%.

At the same time, GCC countries have kept a tight rein on inflation bringing them much lower than those of emerging economies. MENA has also successfully improved its current account balance and public debt numbers each year pulling in the slack from 2009.
The investors are clearly returning. Democratic governments have already been installed in Egypt, boosting confidence and boding well for the future.
Key areas in the current resurgence include construction, education, and healthcare sectors primarily due to the strong emphasis laid by MENA governments in their budget on these aspects. The coming year will see an ever higher spike in across the board investments.

Al Masah Capital’s report highlights the clear benefits of the massive MENA stimulus package and the industries and companies that benefit from such cash injection; and it asks a pertinent question, with such strong support and macro fundamentals, why should foreign investment look anywhere else in the world for an investment safe haven? Ironically, a region that saw an Arab Spring may also be the place that leads the world out of its economic malaise.

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