The current account surplus in the Middle East, North Africa and Pakistan (Menap) region is set to hit $368 billion in 2022 before moderating to $328bn next year as regional economies continue to recover from the coronavirus-induced slowdown amid higher oil prices, the Institute of International Finance (IIF) has said.
Capital inflows into the region will “remain modest” next year, as sovereigns issue less debt amid still significantly high fiscal surpluses, Garbis Iradian, the IIF's chief economist for the Mena region, and senior research analyst Ivan Burgara said in the institute's latest report on Menap capital flows .
Countries in the six-member economic block of GCC are particularly in “sound financial standing”, compared with non-oil exporting countries in the Menap region such as Egypt and Pakistan.
“Increases in the price of oil have led to large fiscal surpluses, filling government coffers and reducing debt,” Mr Iradian and Mr Burgara said.
“Investor sentiment towards oil exporters in the region will remain favourable due to elevated energy prices.”
Oil prices continue to remain high amid supply concerns triggered by Russia’s war in Ukraine and production cuts by the Opec+ group of crude producers, boosting revenue of oil-exporting countries.
Brent, the global benchmark for more than two thirds of the world's oil, was up more than 23 per cent since the start of this year, trading 1.73 per cent higher at $96.31 a barrel at 11.40am UAE time on Friday.
Mena economies are set to expand at their fastest pace since 2016, according to a recent World Bank report.
However, the region is facing a divergent economic recovery, with oil-exporting countries faring better than their oil-importing peers that are struggling with economic impact of the pandemic, rising food and energy inflation and higher interest rates.
Mena economies are projected to grow by 5.5 per cent this year and at a more modest rate of 3.5 per cent in 2023, the Washington-based lender said last month.
GCC economies are projected to grow 6.9 per cent in 2022, driven by high oil prices. Developing oil-exporting economies are forecast to grow at 4.1 per cent this year before slowing to 2.7 per cent in 2023, according to the World Bank.
Non-resident capital flows to Menap countries are expected to hit $128bn in 2022 and $145bn in 2023, driven by improvements in foreign direct investment flows in most countries, as well as a pick-up in official loans to Egypt and Pakistan, the IIF report said.
Overall FDI inflows in the Menap region are forecast to reach $56bn in 2022 and $66bn in 2023 as investments in sectors relevant to the UN's sustainable development goals, especially renewable energy projects, increase.
The UAE, the Arab world’s second-largest economy, is expected to remain the region’s largest FDI recipient, with inflows of $22bn in 2022, accounting for 4.3 per cent of the country's gross domestic product.
“In the UAE, elevated FDI is driven by a friendly business environment, excellent infrastructure, predictable policies … and structural changes aimed at diversifying the economy and creating a dynamic and expanded private sector,” IIF economists said.
Saudi Arabia, Opec's top oil exporter, has also improved its business environment significantly, which will help the kingdom to attract more FDI, they said.
Saudi Arabia's economy expanded by 8.6 per cent in the third quarter of 2022, driven by higher oil prices and government reforms, the General Authority for Statistics said in its flash estimates last month.
In the broader Mena region, the recent creation of a Mediterranean gas centre that lies south of Europe will lead to additional FDI inflows in Algeria, Egypt and Lebanon because of their ample gas reserves, the IIF said.
Bond issuances from the GCC are expected to fall to $40bn in 2022, from $110bn in 2021, mainly due to a decline in sovereign borrowing by oil exporters on the back of sufficient fiscal surpluses.
However, in Egypt, the spillovers from the war in Ukraine and the tightening global financial conditions have caused a protracted balance of payment challenge, the report said.
“Long-standing reliance on non-resident portfolio flows has exposed the Egyptian economy to persistent volatility from the boom-bust cycles of investor sentiment,” it said.
In Pakistan, recent floods significantly raised the South-Asian nation's financing needs.
The IIF expects Pakistan's current account deficit to widen to 4.7 per cent of GDP in the current financial year ending in June 2023.
Such a large deficit, combined with limited non-resident capital inflows, will lead to a further loss in official reserves, the IIF said.