Since the beginning of 2020, the global economy has been experiencing an unprecedented crisis, comparable only to what was witnessed during the Great Depression of the 1920s and 1930s, or even earlier. The COVID-19 pandemic has led to a halt in global economic activity despite the economic stimulus measures taken by governments to mitigate the impact of the shock. However, it is likely that the recession caused by the pandemic will remain a significant obstacle for the international economy for years to come. The future trajectory of the global economy in its recovery efforts is uncertain, primarily depending on how long COVID-19 remains a global threat.
The Middle East and North Africa (MENA) region is heavily threatened economically due to its substantial reliance on revenues from the export of primary commodities and energy sources. With the global demand for these products declining due to the slowdown in global economic activity, the economies of the region are at significant risk, and their future remains highly uncertain.
The current pandemic crisis, due to its depth and severity, has caused a contraction in developing and emerging economies, which had recorded some of the highest growth rates globally before 2020. These economies had managed to maintain stability despite trade wars among major economies, high levels of debt, and falling commodity prices.
According to World Bank estimates, the global economy is expected to contract by -5.2% in 2020, representing the largest contraction since World War II. Advanced economies are projected to experience the deepest contraction, at -7%, while developing and emerging economies are expected to contract by -2.5%. Geographically, all regions of the world are projected to experience contraction except for East Asia and the Pacific. Latin America and the Caribbean are likely to face the deepest recession globally, with their GDP expected to shrink by approximately 7.2%.
Based on the above, it is also expected that the economy of the Middle East and North Africa will contract by -4.2% in 2020. This is due to two main factors: the decline in global oil demand, particularly during the second quarter of the year, which led to a reduction in oil prices by about 50%, reaching their lowest level in over 20 years. Given the importance of oil-exporting economies, which constitute a significant part of the region's economies, the decline in oil revenues presents a major challenge, causing a decrease in the overall output of the oil sector.
Another significant factor affecting economic performance in the region is the deep contraction in the non-oil sector. For example, although the drop in oil prices is expected to reduce growth rates in the oil sector of Gulf Cooperation Council (GCC) countries by 2.7%, according to World Bank estimates, the impact of the crisis will be even more painful for the non-oil sector, which is anticipated to see a growth decline of 4.3% in GCC countries. Similar expectations apply, to varying degrees, to non-GCC countries, reflecting the extensive and profound negative effects of the current crisis on various economic activities in the region.
The region’s financial situation faces an additional challenge that burdens national budgets in 2020, due to the maturity of sovereign external debts amounting to $35 billion. While some of these countries may benefit from initiatives adopted by international institutions, the G20, and creditor countries to defer debt repayments for the poorest nations, there are limitations to these initiatives. The first limitation is that the region’s countries must obtain the approval of their direct creditors to benefit from such initiatives, which is not guaranteed, especially since debt deferral initiatives are not binding on creditors.
The second limitation concerns the region's capacity to handle additional debt. Some countries in the region have entered into negotiations to secure new loans to address the economic fallout from the COVID-19 crisis, with some already obtaining loans and expectations that more will follow. Additionally, many countries have expanded their borrowing through new bond issuances. This approach exacerbates the region's debt crisis by placing new burdens on public budgets, increasing the strain on economies with new debt service obligations. This, in turn, delays recovery by siphoning more liquidity from the economic cycle and puts pressure on local currencies, particularly in countries with flexible exchange rate policies.
Future trajectories for the economy of the Middle East and North Africa (MENA) region can be assessed by analyzing various indicators. While internal resilience of each economy is a critical factor in its recovery from any crisis, the current situation is relatively different due to its nature as a global economic crisis with many complex dimensions. The economic repercussions, particularly in terms of trade restrictions and negative impacts on capital flows, represent major threats to the growth prospects of developing and emerging economies, including those in the MENA region.
If the pandemic persists for an extended period within the region or among its key trading partners, it will lead to prolonged production disruptions, an expansion of negative impacts on supply chains, and a further collapse in levels of confidence and demand. Given that most Middle Eastern countries are producers and exporters of primary commodities and energy sources, these developments will keep global demand for such products at its minimum.
Another significant impact is the effect on investor sentiment and financial risk tolerance, which could result in a sharp decline in both global and local capital flows, particularly in portfolio investment flows, which are highly sensitive to investor mood. The World Bank forecasts that capital inflows to the region are expected to decrease by $100 billion, or 3% of GDP, which exceeds the total amount of portfolio investment inflows received by the region in 2019.
Additionally, there is a likelihood of capital flight from the region’s economies as part of a global trend of capital outflow from developing and emerging economies. This could further exacerbate the economic crisis in the region by leading to reduced investment and production, increased unemployment, and ultimately driving economies towards depression. The world has witnessed similar scenarios in the past, such as during the Great Depression when American capital fled to other countries, eventually leading to economic conditions in Germany that were as severe as those in the United States.
Capital flight will put pressure on the balance of payments in the region's countries, particularly those that are not oil exporters. This will strain their budgets, which will have to bear the burden of servicing foreign debt in foreign currencies. Such a situation could lead to disruptive adjustments in exchange rates, especially in countries with narrow financial buffers and weak economic and financial fundamentals.
Another risk facing the Arab region is the anxiety and reluctance of investors to take on risks, which will impede financial flows to local industries and real economic activities. The majority of granted loans are likely to go to governments and public companies, with investors preferring to purchase sovereign bonds due to their government-backed guarantees. In contrast, corporate bonds, private company bonds, and equities in financial markets will see lower demand.
It is also expected that the prolonged duration of the crisis will lead to higher unemployment rates and a reduction in consumer spending and effective demand. The repercussions could extend to the banking sector, which will face pressure due to loans extended to households and sectors affected by the crisis. The likelihood of defaults on these loans will increase, putting banks and financial institutions—especially those unable to withstand severe financial strain—at risk of bankruptcy.
Finally, it should be noted that these projections are not limited to Arab countries alone but apply to all regions concentrated with primary commodity-exporting nations and those with significant debts. Future forecasts for the performance of these economies will be subject to ongoing reviews, with most revisions likely leading to lower growth expectations and extended recovery periods.
All of this remains contingent upon the effectiveness of economic policies, which play a role similar to that of health policies at the onset of the COVID-19 crisis. During the early stages of the pandemic, health policies aimed to flatten the curve of new infections as much as possible and bolster the capacity of healthcare systems to withstand pressures until the virus’s spread began to recede. Similarly, economic policies must work to flatten the curve of financial and monetary crises, enhancing the local economy’s ability to endure pressures until the global economic crisis begins to wane.
Since early 2020, the global economy has been experiencing an unprecedented crisis, akin only to the Great Depression of the 1920s and 1930s or even earlier. The COVID-19 pandemic has led to a halt in global economic activity despite the economic stimulus measures taken by governments to mitigate the shock's impact. Nonetheless, the recession induced by the pandemic is likely to remain a significant obstacle for the international economy in the coming years. The trajectory of global economic recovery remains uncertain, primarily dependent on how long COVID-19 continues to pose a global threat.
The Middle East and North Africa (MENA) region faces substantial economic threats due to its heavy reliance on revenues from the export of primary commodities and energy sources. With the decline in global demand for these products due to the global economic slowdown, the economies of the region remain at significant risk, and their future remains highly uncertain.
The current pandemic crisis, due to its depth and severity, has caused a contraction in developing and emerging economies, which had recorded some of the highest growth rates globally before 2020. These economies had managed to maintain stability despite trade wars among major economies, high levels of debt, and falling commodity prices.
According to World Bank estimates, the global economy is expected to contract by -5.2% in 2020, representing the largest contraction since World War II. Advanced economies are projected to experience the deepest contraction, at -7%, while developing and emerging economies are expected to contract by -2.5%. Geographically, all regions of the world are projected to experience contraction except for East Asia and the Pacific. Latin America and the Caribbean are likely to face the deepest recession globally, with their GDP expected to shrink by approximately 7.2%.
Based on the above, it is also expected that the economy of the Middle East and North Africa (MENA) region will contract by -4.2% in 2020. This is due to two main factors: the decline in global demand for oil, particularly during the second quarter of the year, which led to a drop in oil prices by about 50%, reaching their lowest level in over 20 years. Given the importance of oil-exporting economies, which form the dominant block in the region’s economies, the decline in oil revenues poses a significant challenge and is a major reason for the decrease in the overall output of the oil sector.
The other major factor affecting the region’s economic performance is the deep contraction in the non-oil sector. For instance, although the drop in oil prices is expected to reduce the growth rates of the oil sector in the Gulf Cooperation Council (GCC) countries by 2.7%, according to World Bank estimates, the impact of the crisis will be more severe on the non-oil sector, with growth in the GCC countries projected to decline by 4.3%. These expectations broadly apply to non-GCC countries as well, indicating the substantial and deep negative effects of the current crisis on various aspects of economic activity in the region.
The region’s financial situation faces an additional challenge in 2020 due to the maturity of external sovereign debts amounting to $35 billion. While some countries may benefit from initiatives adopted by international institutions, the G20, and creditor countries regarding the postponement of debt repayments for the poorest countries, there are constraints on this. The first constraint is that the region’s countries’ eligibility for the initiative remains conditional on the agreement of their direct creditors, which cannot be guaranteed, especially since the debt postponement initiative is not binding for creditors.
The second constraint concerns the region’s economies’ capacity to bear additional debt, as some countries have entered negotiations for new loans to address the economic fallout from the COVID-19 crisis, with some already securing loans and more expected to obtain further loans. Additionally, many have expanded borrowing through new bond issuances. This approach exacerbates the debt crisis in the region, adding new burdens to public budgets and increasing economic strain from servicing new debts. This delay in recovery is due to the withdrawal of additional liquidity from the economic cycle and the pressure it places on local currencies, particularly in countries with flexible exchange rate policies.
The future trajectories of the economy in the Middle East and North Africa (MENA) region can be determined by analyzing various indicators. While the internal resilience of each economy is a crucial factor in its recovery from any crisis, the current situation is somewhat different due to its nature as a global economic crisis with many complex dimensions. The economic repercussions, especially in terms of restricting trade and its negative impact on capital flows, pose a significant threat to the growth potential of emerging and developing economies, including those in the MENA region.
The prolonged continuation of the pandemic in the region or among its major trading partners could lead to extended disruptions in production, an expanded range of negative effects on supply chains, and a greater collapse in levels of confidence and demand. Given that most Middle Eastern countries are producers and exporters of primary commodities and energy resources, these developments keep global demand for these products at minimal levels.
Another significant issue is the impact on investor sentiment and risk tolerance, which could result in a sharp decline in both global and local capital flows, particularly in portfolio investments that are highly sensitive to investor mood. The World Bank projects that the capital flows expected to the region during the crisis will decrease by $100 billion, or 3% of GDP, which exceeds the total amount of portfolio investment flows into the region in 2019.
There is also a possibility of witnessing capital flight from the region's economies as part of a global trend of capital outflow from emerging and developing markets. This could exacerbate the economic crisis in the region by reducing investment and production, increasing unemployment, and potentially pushing economies into recession. Historical precedents, such as during the Great Depression, illustrate how capital flight from the U.S. to outside Germany contributed to a severe economic downturn in Germany.
Capital flight will put pressure on the region’s balance of payments, especially in non-oil-exporting countries, and burden budgets with the need to service foreign debt in foreign currencies. This situation could lead to disruptive adjustments in exchange rates, particularly in countries with narrow financial buffers and weak economic and financial foundations.
Another risk facing the Arab region is investor anxiety and aversion to risk, which will deter financial inflows into local industries and real economic activities. Instead, a significant portion of loans will likely be directed towards governments and public companies. Investors will prefer buying sovereign bonds for their government-backed guarantees, while industrial company bonds, private companies, and equities in stock markets will see reduced demand.
It is also expected that the prolonged duration of the crisis will lead to an increase in unemployment rates, a contraction in consumer spending, and reduced effective demand. These consequences may extend to the banking sector, which will face pressure from loans granted to households and sectors affected by the crisis, leading to a higher likelihood of defaults. This situation could put banks and financial institutions, especially those unable to withstand severe financial pressure, at risk of bankruptcy.
Finally, it is important to note that these estimates are not only applicable to Arab countries but also to all regions with significant primary commodity exporters and high levels of debt. Future projections for the performance of these economies will be subject to continuous revisions, with most revisions likely indicating lower expected growth rates and extended recovery periods.
All of this is contingent upon factors related to the efficiency of economic policies, which may play a role similar to that of health policies during the early stages of the COVID-19 crisis. Just as health policies aimed to flatten the curve of new infections and strengthen the capacity of health systems to avoid failure under pressure, economic policies must work to flatten the curve of internal financial and monetary crises and enhance the local economy's resilience until the global economic crisis recedes.