25
Jun
“A higher score does not necessarily mean an economy is guaranteed to outperform, but rather, that their current macro, social and political backdrops are simply more favourable to fostering stronger private-sector led growth over a longer time horizon. One missing variable – which one could argue is the key ingredient for faster and more sustainable growth – is the degree of reform momentum. While this variable has been left out of the analysis as it is difficult to quantify, it also leaves open the possibility that countries which currently score poorly on this rating scale could improve their growth potential by pushing ahead with necessary reforms.
“Our ratings encompass an equal number of social and economic variables, in addition to two indicators on population. The first, size of population, was included as the size of a domestic market is a relevant factor for foreign investors, regardless of how quickly it is growing. The second, GDP per capita, was used to assess the extent of convergence potential. In this sense, a lower GDP per capita might signal an underdeveloped economy, but it also reflects more opportunities to converge (i.e. ‘catch up’) with peers over the long term. Looking at these two indicators in isolation, Egypt scores particularly strongly, as its massive domestic market of 82mn is 156% larger than the regional average, while only Morocco has a lower GDP per capita ($3,092).
“The economic variables which we used included: inflation, gross fixed capital formation (GFCF), fiscal deficit, FDI and external debt (the last four as a percentage of GDP). High levels of three of the indicators – inflation, debt and budget deficits – are seen as detrimental to growth, as they tend to result in higher interest rates and weaker investment. In contrast, GFCF is crucial to an economy’s long-term outlook, as such spending is necessary to raise productivity, while levels of FDI reflect an economy’s attractiveness to external investors, and simultaneously act as a stable form of financing.
“Algeria scored the highest in this regard, which is a reflection of its low debt, strong fiscal position and heavy domestic investment rates (despite a weak business environment and minimal FDI).
“That said, as many of the economic variables used historical data (averages for the past five years), they do not tell us much about how these ratings will evolve. For instance, with oil prices having stabilized in the $65/bbl area, we would not be surprised to see the economic scores of the oil exporters (Algeria, Libya, Iran and Iraq) deteriorate over the coming years. Egypt has the lowest economic score at the moment, as its rating is weighed down by a large budget deficit and elevated inflation, in addition to very low levels of fixed investment.
“The social variables that we looked at included: life expectancy, corruption, internet penetration, security risks, and emigration rates. In terms of the latter, while education levels are generally a positive indicator for development, high levels of tertiary educated emigration signal a lack of employment opportunities and weak confidence in an economy’s long-term outlook. Lebanon scores poorly in this regard, and in fact has one of the highest rates of emigration amongst its most educated segments of society of any country in the world. Many of the other indicators are fairly straightforward, with health standards, transparency and connectivity correlating with stronger growth outcomes.
“Although difficult to quantify, security risks are also a pertinent factor for this region, and could play a decisive role in long-term macro trends. For this, we used the rankings provided by the Global Peace Index, which takes into account 22 political and security risk variables. Not too surprisingly, Iraq and Libya have the worst social indicator scores, which largely reflect the ongoing conflicts in those countries. It can also be argued that Jordan scores too highly in this regard, as the country continues to border two separate civil wars, which could see negative spillovers (i.e. refugee inflows) for many years to come.
“After determining the performance of each economy relative to its peers, which gives us a score out of 10, we then took an average of all 12 indicators to provide a final score. Removing one or several of the variables altered the rankings slightly, however the broader picture remained intact.
“Taken together, the results reinforce our positive long-term outlook on Morocco, as the North African country scores the highest amongst its peers. We have long argued that this market possesses some of the strongest potential in the MENA region, with its large population, low government debt, relatively sound macro fundamentals, ability to attract FDI, and political stability setting it apart from other economies. Although we left this variable out of our analysis, Morocco was also named one of the strongest reformers in the World Bank’s Ease of Doing Business survey in recent years. Once again, these results do not mean the economy will definitely outperform over the long term, but simply that the conditions are currently in place to help make the country an outperformer compared to other markets in the region.”
Source: http://www.cpifinancial.net/news/category/economics/post/31807/emirates-nbd-research-release-mena-long-term-outlook-for-june