Economic Outlook North Africa: Slow recovery

The economies of North Africa continue to face a challenging growth path as the region searches for stability and recovery in the wake of last year’s Arab Spring. The growth outlook has been revised downward in light of the significant headwinds from the ongoing turmoil, political and policy uncertainties, and the weakening external environment.

Political turbulence and social unrest will discourage investment and cloud economic prospects particularly in Egypt, Libya and Morocco. The crises are driven by both political and social pressures – high unemployment, high and rising living costs and low standards of living.

Oil exporting countries enjoyed a lift in 2012 from rising oil production and continued public spending and investment. However, they will see softer growth in 2013 as demand slows, reducing both output and prices.

Construction impact

In North Africa, real GDP will end 2012 with +3.5% growth, reflecting a rather robust technical rebound in Libya as the country has been successful in bringing its crude oil production back online. Tunisia, Egypt and Libya have struggled through their respective political transitions, while unfavourable weather conditions undermined the economies of Algeria and Morocco in the first half of the year.

Construction spending in many of these countries is hard to monitor. However, virtually any increase in GDP requires a similar increase in construction spending, so GDP growth can be used as a reasonable proxy for construction spending. There is a surprising diversity of GDP growth prospects across the region, ranging from barely over +1% in Sudan to better than +6% in Morocco.

Risk scores

Similarly, while the region offers high risk across the spectrum, there are significant differences in the picture. The risk scores comprise a series of measures such as how difficult it is to repatriate earnings, enforce contracts and protect patents as well as what degree of corruption exists, how stable the work force and supply chains are, how stable the currency is and the outlook for inflation. These and other, similar factors are combined into a risk score where 0 implies absolute safety and 100 represents complete economic and political collapse.

One cannot view regional risk in isolation, so the chart includes two landmarks. The first is the large yellow bubble which represents the average risk and growth prospects for the 69 countries that IHS Global Insight includes in its Global Construction Outlook (GCO).
The smaller red bubble represents the average values for all countries. The size of the bubble reflects the size of each economy. Since the GCO includes most developed economies, the GCO average is larger, less risky and slightly slower growing than the world average.

The goal is to find the countries with the greatest potential return with lowest possible risk. Morocco is the clear winner in this regard, but Tunisia, Egypt and Mauritania offer above average growth potential if one will accept moderate risk. Libya offers attractive growth, but the elevated risk level will be unacceptable to many. Algeria offers below average growth, but is a relatively safe bet in this neighbourhood. The clear place to avoid is Sudan with high risk and poor growth potential.

Resource nationalism

In Algeria, growth in the hydrocarbon sector will continue to lag as a roll-back of industry liberalisation due to heightened resource nationalism hampers investment. Despite recent amendments to the investment in non-conventional oil and gas offering greater tax incentives, the amendments did not make significant changes that might encourage more broad foreign investment into untapped conventional reserves. There is still a 51% domestic ownership rule, for example.

This means non-hydrocarbon sectors will lead growth thanks to a continuation of strong public spending and investment that was redoubled during the regional turmoil of 2011. Indeed, activity in the non-hydrocarbons sector will benefit from expansions in construction and utilities designed to upgrade infrastructure and private housing. In particular, investment enhancing the country’s production and distribution of electricity will be a key growth driver.

A slow recovery is expected for Tunisia as the country searches for stability and recovery following last year’s Arab Spring. Tunisia will see only a moderate recovery in 2012, as prospects remain vulnerable to the country’s political and policy uncertainties.
Real GDP will expand +2.5% this year in light of the continued domestic turbulence and less rosy global economic conditions. Muted growth of +3.1% is also expected in 2013 as Tunisia wades through its political transition.

With the Eurozone in recession and a limited fiscal scope for prolonged stimulus measures, Tunisia will require some degree of foreign aid to recover. Aid which flows from bilateral and multilateral donors such as the G8 will likely accelerate now that the new government has been established.

Although authorities have pledged to maintain Tunisia’s pro-business policies and openness to foreign investment, the new political landscape and fragile post-revolution environment will continue to dampen business activity and discourage investment among local businesses and foreign investors. The new coalition government also faces the difficult task of addressing the underlying causes of the crisis – economic deprivation, the rising cost of living, and high unemployment.

Slow improvement

From a construction standpoint, the issues facing Algeria and Tunisia represent those of the region at large. The near term will feature slow improvement, with growth in the medium term emerging as political stability is re-established. The faster and more directly that new governments are able to deal with their social and demographic issues, and the more that they move to adopt policies that aim to attract and encourage investment, the sooner and stronger growth will return.