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OUTLOOK 2021-2025

Dr. Leila R. Benali
Former Chief Economist (2019-2021)

Apr 30, 2021

Overcoming the Pandemic

The resurgence of the virus or its variants in several parts of the world and uneven access to vaccines is disrupting the recovery of the global economy and drawing different recovery paths. Following an estimated real GDP contraction of -3.3% in 2020, global GDP is expected to increase by 6% in 2021. The MENA region is expected to rebound by 4% in 2021 compared to a 3.4% drop in 2020. The more pertinent question is how sustainable this recovery will prove to be. The path to recovery in most countries will continue to be supported by expansionary economic policies and fiscal tools. This path will be diverse, asynchronous and not necessarily sustainable for all. The most optimistic outlooks expect widescale access to vaccines by mid-2021. However, unbalanced realities exist between geographies in terms of the incidence of the virus and the related containment policies. With the deployment of massive stimulus packages and subsequent widening public deficits and growing levels of public debt, concerns on sustainable recoveries are surfacing in several countries. In the United States, the public budget deficit reached 15% of GDP in 2020. By comparison, this figure in emerging markets such as MENA, non-OECD Europe and Latin America reached 10%, 6% and 11%, respectively, in 2020, and is expected to fall to 7%, 4% and 7%, respectively, in 2021. Diverging health, economic and financial conditions and policy choices may lead to a K-shaped* global recovery characterized by diverging recovery paths. Certain sectors of the economy will experience a relatively swift V-shaped** recovery while others may suffer from a slower and more protracted L-shaped*** recession. With the weight of public debt threatening growth prospects over the medium and long terms, reducing high public sector-debt-to-GDP ratios looms as a major challenge. The recovery path for MENA economies will tread somewhere between the leading Asia-Pacific region – which is expected to drive the momentum as it positions itself as the engine of global economic recovery – and the trailing commoditydependent emerging markets in Latin America. However, the recovery path in MENA will remain relatively sensitive to oil price fluctuations. Barring unilateral technical adjustments or supply-side surprises, oil prices for the rest of 2021 will depend on how OPEC+ chooses to manage the market rebalancing. It is expected that uneven demand recovery across regions and sectors will emerge as China and India’s heavy lifting loses steam. These factors, coupled with a weak dollar, will prompt major exporters to seek increased flexibility. As a result, the market will remain in backwardation for the short term, with a base case scenario for oil demand growth estimated at 5.5 MMB/D in 2021 and 2.5 MMB/D in 2022, and for Brent crude to average USD 50-60/ barrel during 2021-2022 with potential episodes of volatility. I. E

After the 2020 recession, the MENA region is expected to witness a delicate rebound in 2021, driven in most countries by commodity prices and exports. After a regionwide average of 3.4% contraction in 2020 – excluding Egypt’s notable 3.6% GDP growth* – the region’s economic growth is estimated to rise to 4% in 2021 and 3.7% in 2022. Countries’ external balances are under severe pressure in light of a drop in foreign revenues, slump in oil and tourism/Hajj revenues, and fall in personal remittances. As massive stimulus plans are being deployed, the resulting widening public deficit – which reached 10% of GDP regionwide in 2020 which is expected to drop to 7% in 2021 and 4% in 2022 – raises concerns on how sustainable the recovery will be, especially for countries with tight fiscal wiggle room. Only a handful of countries possess the ingredients in terms of governance, clear macroeconomic and fiscal policies and public finance management to translate those stimulus packages into productive debt. The varying degrees of success in the race to vaccinating the population illustrates the asynchrony and lack of integration between countries. Moreover, the pandemic had a mixed impact on economic diversification efforts despite large stimulus packages as less resilient non-oil sectors got pummeled, with the most severely impacted ones – like tourism, retail, and hospitality – witnessing bankruptcies and foreclosures . For hydrocarbons producers, this decade might prove to be the last window for the low-cost producers to firmly re-establish their market share, particularly Saudi Arabia and Qatar. The diverging economic recoveries observed in the region in 2021 foretell a fragile financial sustainability for several MENA governments as they face the challenge of financing the growing debt and stimulus packages needed to accelerate the economic rebound in 2021 and beyond against worsening balance sheets. Debt capital markets will remain the main tool through which diverse stimulus packages are financed. In 2020, GCC countries issued a record USD132.7 billion in international bonds and sukuk, more than half of which – USD66.3 billion – was in the form of sovereign bonds. Outside the GCC, Morocco successfully arranged its largest bond sale ever at USD3 billion in 7, 12 and 30-year tranches in late 2020, while Egypt issued a USD3.75 billion bond in 5, 10 and 40-year tranches in mid-February 2021. With more issuances of this size expected in the region, strict fiscal consolidation and painful structural reforms are likely to develop as key priorities in the coming years. The full impact of the 2020 crisis however remains highly uncertain at this stage at both country and regional levels, with widening inequalities and political instability emerging as additional risks which will skew economic growth to the downside. On a positive note, 2020 was a record year for green financing. Since 2016, the MENA region issued a total of USD10.38 billion of green bonds, a record USD3.3 billion of which came in 2020. ESG commitments, standards and certifications are expected to remain atop national agendas from 2021 onwards in lockstep with the accelerating momentum towards green price premiums in energy, petrochemicals and other commodities.

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