Home Business Oil and politics are squeezing this Middle Eastern state

Oil and politics are squeezing this Middle Eastern state


Kathmandu,May 20,2016: Oil producers in the Middle Easthave been burned by the commodity’s lower prices.

And this has people worried about a negative spillover effect into other Middle Eastern economies.

For most non-oil producers in the region, including Morocco and Tunisia, the benefits from lower oil prices outweigh (or, at least, offset) the negative effects from the weaker Gulf growth.

However, one country looks to be in a particularly uncomfortable position: Egypt.

“Egypt … looks vulnerable and a period of weaker remittances and, potentially, less official financing, will add to fears over the country’s balance of payments position,” argued Capital Economics’ Jason Tuvey in a recent research note.

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As economic growth sputters in the Gulf, companies are laying off employees — many of whom are foreign workers. And this is problematic for Egypt, which is one of the more exposed countries to the Gulf slowdown and remittances.

Total remittances into Egypt are already falling by 15% year-over-year, according to data cited by Tuvey, which will squeeze individual households and their consumption. Plus, he estimates that every 10% drop in remittances from the Gulf leads to the current account balance to drop by about 0.4%-0.8% of GDP.

Moreover, there’s also a geopolitical angle to Egypt’s troubles, as Tuvey explains in his note (his emphasis):

Of course, since the Arab Spring uprisings in 2011 the Gulf countries have proven to be an important source of financial support for many countries in the region. Indeed, if it wasn’t for the Gulf’s provision of billions of dollars in grants, loans, and petroleum products, Egypt would almost certainly have faced an outright balance of payments crisis by now. But while lower oil prices may play a role at the margin, we suspect that the more important factor in determining the generosity of the Gulf countries will be regional politics. Indeed, it’s worth noting that Saudi Arabia has been less forthcoming with financing for Egypt after Cairo supported Russia’s intervention in Syria. And Saudi support for Lebanon has been cut-off amid concerns over the influence of Iran-backed Hezbollah within the Lebanese government.

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And on top of that, since last year’s downing of a Russian aircraft, which crashed on Egypt’s Sinai Peninsula, tourist arrivals have plunged dramatically and some flights to the country are still postponed.

Data cited by Tuvey in a different note shows that visitors fell by nearly 50% in March year-over-year — and that number is creeping close to a decade low on the basis of a twelve-month sum.

Notably, there are some positive factors in Egypt’s economy, such as the fact that natural gas output is rising again — meaning that Egypt’s economy won’t completely collapse.

In sum, “all told, we think that GDP will expand 3% this year, although the risks to this forecast lie on the downside,” he concluded.