Petrodollars boost MENA's private sector

Key points:

• The economic rebound from the corona crisis in the Middle East and North Africa (MENA) will continue into 2022. The higher oil price kicks in, the oil production restrictions of OPEC+ are being phased out and investment in hydrocarbon production capacity will pick up, despite the global energy transition. Meanwhile, corona-related downside risks to the outlook remain.
• Higher oil revenues will help maintain momentum in non-oil sectors by creating some leeway for increased government spending in the Gulf Cooperation Council (GCC) countries and by sustaining remittances to energy-importing economies.
• Monetary tightening due to expected interest rate hikes in the US will initially be limited in the GCC, as banking sector liquidity is simultaneously boosted by fresh petrodollars. We also expect no major financial stress or massive capital outflows in most energy-importing economies; Tunisia and Lebanon are exceptions.
• Medium-term economic growth prospects are less bright. The private sector in the region is underdeveloped and business is stifled by state interference. Despite private sector reform initiatives, inward foreign direct investment remains subdued and focused on the traditional state-owned hydrocarbon sector.
• With shock resilience eroded by oil price swings, sovereign risk has increased. The higher oil price is currently aggravating balance of payments pressure in Tunisia, while without significant progress on fiscal reforms Oman and Bahrain will struggle to withstand a future oil price decline due to unsustainable public finances.

Niels de Hoog, senior economist
niels.dehoog@atradius.com
+31 20 553 2407