It's Not over till It's Over: The Regional Economy Is on the Road to Recovery after a Tumultuous 2009. the Next Six Months Will Determine the Speed of Rebound. However, There Remain Underlying Risks to Benign Global Market Conditions That Could Still Impact the Region, Warns International Economic Analyst Moin Siddiqi

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THE MIDDLE EAST AND NORTH AFRICA (MENA) economies are emerging from the worst global recession since the 1930s and recovering at a steady pace. Several factors are supporting the upturn, chiefly firmer oil prices (boosting production and exports), public investment programmes, especially in infrastructure, and some normalisation of global trade and capital flows. Fiscal policy has played a pivotal role in cushioning the impact of the financial crisis. Across most countries, stimulus measures alongside lower interest rates are needed to help cement the recovery. The World Bank projects growth in the MENA should reach 4.4% in 2010, edging up to 4.8% next year.

The Gulf Cooperation Council (GCC) bloc is leading this recovery, supporting domestic demand and providing intra-regional investment in non-oil countries.

The recent increases in capital spending on non-energy sectors will help diversify activity towards the manufacturing and services sectors, thereby creating new jobs and rebalancing regional growth. The 'twin surpluses'--the government budget and current account--of oil exporters are forecast to widen again thanks to increased exports. Accumulated forex reserves and other assets should enable governments to support the growth revival. The GCC's net foreign assets could total a whopping $1.2 trillion by the end of 2010.

As in other regions, growth prospects for 2010 differ markedly among MENA economies, depending on the intensity of initial impact via the three key channels through which the region is exposed to the global marketplace: the oil factor; the external sector--trade, remittances and inward investment; and the banking system. Across the Gulf, heavy doses of fiscal and monetary stimuli cushioned the slowdown. Among the fuel exporters, the strongest performer is again Qatar, where real activity is projected to expand by 18.5%, powered by large expansion in liquefied natural gas production and capital spending.

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In Saudi Arabia, GDP is expected to grow at about 4%, compared with a meagre 0.2% in 2009, supported by infrastructure development and improved business sentiment, leading to a revival in private consumption. The five-year fiscal stimulus programme, worth some $400 billion, including the building of new industrial cities and ports, has opened up opportunities in project finance, construction and manufacturing. Meanwhile, the Kuwaiti economy after contracting in 2009 should rebound to between 2.3% and 3.2%, helped by rising oil production and strengthening domestic demand. In early 2010, the National Assembly finally approved a four-year $105 billion spending package to kick-start economic activity.

Referring to Kuwait, the International Institute of Finance (IIF), a US-based association of private banks, said: "A higher level of sustained growth requires a political consensus on much-needed reforms and a shift in government spending to support increases in nonhydrocarbons productive capacity in the private sector." However, the pace of market liberalisation in Kuwait is slow compared to its peers.

In the UAE, growth is expected to achieve a moderate 2%, according to the IIF, reflecting further contraction in the property-related sector, thus more than offsetting timid upturns in trade, retail sales and tourism. Dubai's estimated $109 billion debt stock--owing to overinvestment in real estate and tourism ventures as well as leveraged buyouts (LBOs) worldwide--still overhangs the markets, although Abu Dhabi's support for bond issues worth $20 billion to support struggling Dubai-owned firms has limited contagion to the rest of the Emirate and the banking system.

The World Bank remarked: "These short-term measures are helping to contain the negative impact of these events on UAE growth. Ongoing large fiscal spending by Abu Dhabi is also expected to help the recovery and support the 'service centre approach' to integration and economic development. …