The Middle East's Economic Outlook

October 22, 2003
By Michael Mussa

What does the future hold for the economies of the Middle East? 

The situation in Turkey is of great concern.  After a very strong recovery from the deep difficulties of 2001, there will likely be at least a short-term slowdown in Turkey’s economic growth.  This may well be followed by another upsurge in growth next year—in line with the boom and bust pattern of Turkey’s economy since 1999. 

More worrying for the longer term is the now evident slowdown of economic reform in Turkey.  Last year’s fiscal deficit limits (agreed with the IMF) were significantly exceeded in the pressures of an election year.  This year’s targets may be met, but only with the aid of one-time fiscal gimmicks and accounting dodges.  Also, the Turkish government seems to be getting back into the bad business of using banks (particularly state-owned banks) to extend credit to favored enterprises and sectors of the economy.  In the past, this practice has led to large-scale losses in the banks that ultimately show up in public debt.  Indeed, as much as a third of Turkey’s present huge public debt is the result of the ultimate recognition of such losses.  

At about 80 percent of GDP, Turkey’s huge public debt is a continuing threat to economic and financial stability.  The recent favorable change in market sentiment toward Turkey (and toward emerging market debt more generally) has tempered the immediate threat.  The perception that Turkey continues to do reasonably well under its IMF-supported reform program—and is still likely to receive further financial support from the United States--has reinforced these gains in market sentiment.   However, if market sentiment again turns negative in two or three years (perhaps because of belated recognition of limited progress in economic reform), Turkey’s very large public debt and its already large outstanding obligations to the IMF will make the situation very difficult to manage.

The war in Iraq ended swiftly with a minimum of casualties and little physical damage to essential economic infrastructure.  Restoration of security, of public utilities, and of economic activity—including in the oil sector—however, has progressed more slowly than might have been hoped.  For the Iraqi economy, therefore, the short-term effects of the war and the initial stages of reconstruction have surely meant a substantial fall in an already low level of activity.  Iraq’s immediate neighbors have also felt some negative economic impact from the war and its aftermath, but the effect has generally not been severe.

For world oil markets, the failure to bring Iraqi production and exports rapidly back on line has contributed to a continued high level of world oil prices—which have generally run about $30 per barrel since May.  For major oil exporters, including Saudi Arabia, Kuwait and the United Arab Emirates, these higher oil prices have contributed to somewhat stronger than expected economic performance.

Meanwhile, the Israeli economy has continued to stagnate in the face of ongoing conflict with the Palestinians, and this situation appears unlikely to get much better any time soon.  The Egyptian economy has been growing relatively slowly, partly reflecting economic and political difficulties elsewhere in the region. 

All of this suggests that my April forecast of only one half of one percent growth for the Middle East region in 2003 is about right.  For 2004, a stronger global growth environment and progress in addressing key regional problems in Iraq and elsewhere still offers the hope that regional real GDP growth will strengthen meaningfully to about 3 percent.

Michael Mussa is a Senior Fellow at the Institute for International Economics (http://www.iie.com)  This essay is based on a presentation given at the Institute on September 9, 2003.  A fuller version can be accessed at http://www.iie.com/publications/papers/mussa0903.pdf.