Effect of Recent Events and Trends on the MENA Economy

Aathira Prasad provides economic insights on the Middle East to Duke's Fuqua School of BusinessAathira Prasad is an economist with a deep understanding of the Middle East. She is director at Nasser Saidi & Associates, a specialized advisory firm based in the United Arab Emirates that focuses on providing consulting services to a diverse range of clients.

Prior to that, she spent nearly five years at the Dubai International Finance Centre (DIFC), most recently as director of macroeconomics and statistics—a position where she provided economic analysis and forecasts of the MENA region and contributed to the DIFC’s strategic plans. She has also co-authored a number of research papers focusing on economics of the MENA region.

Earlier this year she shared her expertise with Global Executive MBA students from Duke University’s Fuqua School of Business who were studying in Dubai. More recently she provided insights into the region’s current economic climate in a Fuqua Q&A.

Q) The large Saudi Arabia stock market that had previously been off limits for direct foreign investment recently opened up. How do you think this will affect the Gulf economy as a whole?

The opening up of the Saudi market is an important milestone: simply because Tadawul alone accounts for more than 50 percent of the market cap of the Gulf Cooperation Council (GCC) countries and is the most liquid. The country is also the largest economy in the Middle East, with a nominal GDP of USD 752 billion in 2014. Tadawul has over 160 stocks, a market capitalization of approximately USD 530 billion and is relatively more diversified compared to other exchanges in the region, with sector representation from petrochemicals, banking, telecom companies, retail and real estate.

However, simply opening the market to qualified foreign institutions is not sufficient to make the market an attractive one. Much reform is needed: efficient financial markets require breadth (a wide variety of financial securities and instruments), depth (sufficient size to enable transactions without leading to large bid-ask spreads) and liquidity (ability to enter and exit markets without affecting price). Saudi needs active money markets, bond and Sukuk markets, and could even use the opening up of its capital markets to encourage more listings of both Saudi and GCC companies (dual listings). All this would contribute towards Saudi’s long-term goal of economic diversification and reduce over-dependence on oil revenues.

Q) What are some things that could be done to mitigate the risk involved with oil price fluctuations and dependency on it as an export?

The region’s abundant oil reserves have resulted in an over-reliance on oil revenues; the fall in oil prices alongside high dependence of GCC governments on oil revenue has resulted in a substantial impact on budgets. The GCC is expected to report deficits amounting to USD 113 billion or about 8 percent of GDP this year. The GCC countries however, can draw on accumulated financial buffers and substantial international reserves to offset the negative effects on economic growth. But this cannot be sustained over the medium-term: the countries need to introduce policies aimed towards fiscal consolidation i.e., expenditure reduction and revenue diversification.

Three key policies that could be introduced include: (1) elimination of fuel subsidies in a phased manner alongside raising prices of public utilities; (2) revenue diversification and taxation (through value-added tax and other broad-based taxes like excise duties); and (3) energy efficiency improvements. This recent Gulf Business op-ed from my company’s founder and president goes into further detail.

Q) Some of your past research states that demographics and urbanization will be key to the future of the MENA and South Asia region. How are these two factors shaping business there?

The region’s young, fast-growing population is a blessing, considering the aging workforce in many advanced nations. However, demographics may also be the region’s biggest challenge long-term. MENA has one of the youngest and fastest-growing populations on earth: by 2025, it will be home to 500 million people, two-thirds of whom will be under the age of 30, and more than half of whom will be under 24. There are, however, nowhere near enough jobs for them; indeed 100 million are needed by 2020 to match the number of people entering the workforce, and that number will rise to 130 million if female labor force participation rates (which are typically very poor in the region) rise to even 50 percent of male rates.

Private sector job creation is also essential, with the public sector being completely saturated. Local governments must urgently implement the reforms needed to re-orient toward greater private sector employment of nationals. Local talent—especially women—remains poorly represented in the GCC’s labor markets, which have been dominated by foreign workers for decades. Inadequate state education has exacerbated the problem, and has left young people badly equipped for corporate life. While some countries have implemented ‘localization’ policies in order to boost the number of nationals in private-sector employment, the impact has been limited in practice.

Urbanization is another key factor. By 2050, it is expected that the proportion of urban population will rise to 79 percent from around 60 percent in 1990. Rapid urbanization levels place additional pressure on various resources including food, water, rail and road infrastructure, energy, and housing to name a few. Burgeoning middle classes in megacities would also imply that there is a growing subset of consumers with different tastes and preferences, meaning the businesses need to re-orient their policies to meet these requirements.

Q) What are some of the key game changers that will influence the MENA region in the next few years?

The détente with Iran and the Dubai Expo 2020 will be two key events in the immediate future that will influence the economic performance of the region. If priority is given to reforms that focus on empowering women and also encourage business, this could change the growth path of the region. Greater regional integration would also work in the regions’ favor, especially if the GCC takes the first step and a leadership role towards making this a reality.

Q) What advice would you give women in the Middle East who want to pursue leadership roles in economics and/or business consulting?

The role of a mentor is key, but never stop seeking input from peers as well, in order to better your performance. It is important to set personal and business goals; review them often and never be afraid to dream big! Accept that there will be failures, but learn from those mistakes. I also believe it is important to be honest to yourself and always do your best work.

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