North Africa among the least affected by the global financial crisis

Author: Media Eghbal

Date published: 14 Jan 2009

The impact of the 2008 global financial crisis on Algeria, Tunisia and Morocco has been minimal. The region is expected to continue growing in 2009, yet export revenues, remittance inflows and tourism receipts are projected to weaken due to the recession in Western Europe.

Issue

The immediate impact of the 2008 global financial crisis on Algeria, Tunisia and Morocco has been minimal:
As the global financial system suffered huge losses as a result of collapse of the US sub-prime mortgage market and exposure to high risk assets, North Africa's banking system appeared insulated from the crisis. Banks in Tunisia, Algeria and Morocco had minimal exposure to foreign assets;
Tunisia's stock market was one of the few in the world to remain positive registering 17.0% yearly growth in November 2008. Morocco's stock market fell by 5.0%, while most other markets fell by 40.0% and more in the same period.

Yet as the financial crisis triggered a global slowdown, the Maghreb economies are set to face its effects. Export revenues, capital inflows and tourism are expected to slow.

Importance

Tunisia, Algeria and Morocco enjoyed economic growth over 2002-2007, with annual real GDP growth averaging 4.7%-4.8%:
Growth in Morocco and Tunisia has been driven by manufacturing and agricultural exports as well as tourism and remittances. For example, tourism receipts accounted for 6.7% of GDP in Tunisia in 2007. Remittance inflows intensified from 2000 to 2007, especially in Morocco where they grew from US$2.2 billion in 2000 to US$6.7 billion in 2007;
Algeria's political stability since 2001 allowed it to boost hydrocarbon exports, earning windfall revenues as oil prices rose. Algeria's hydrocarbon revenues have fallen as oil prices collapsed amid the global slowdown, from US$147 per barrel in July 2008 to less than US$40 per barrel in December 2008. Algeria's budget for 2009 is based on an oil price of US$54 per barrel but foreign exchange reserves totalling US$137 billion in 2008, should support government spending;
Morocco and Tunisia are affected by the recession in Western Europe, their main trading partner. The eurozone entered recession in the third quarter 2008 and the UK economy is expected to shrink by -1.3% in 2009.

North Africa’s exports by destination as a percentage of exports: 2007
Source: Euromonitor International trade sources/national statistics

Growth in Morocco and Tunisia is set to weaken as the slowdown in Europe affects tourism, remittances and exports. Algeria is expected to be more resilient, yet falling commodity prices will have a dampening effect.

Implications

As Europe and other developed economies are facing recession in 2008-2009, North African economies will be affected:
The recession in the developed world dampens demand for North African exports. In 2007 export revenues as a share of GDP was 44.7% in Algeria, 42.7% in Tunisia and 19.5% in Morocco. This could lead to job losses especially in Morocco and Tunisia where export industries and agriculture are labour intensive;
As European consumers restrict discretionary spending, the tourism industry in Tunisia and Morocco is set to slow. At the same time, North Africa's proximity to Europe puts it in a better position than other tourist destinations in Africa and Asia;
As unemployment in Europe rises, remittances from North African migrants living in Europe will weaken, affecting household consumption at home. In Morocco remittance inflows equalled 9.0% of GDP in 2007, compared with 5.0% in Tunisia and 2.2% in Algeria.

Remittances inflows as a percentage of GDP: 2007
Source: World Bank

Local and regional investment could provide economic stimulus during the global slowdown:
Due to the recession in developed economies, Gulf investors are expected to focus their attention on the Middle East and North Africa where growth is expected to continue. In November 2008, Gulf investors announced US$1.7 billion of investments in real estate projects in Morocco and plans for similar projects in Tunisia. However, Gulf investments depend on hydrocarbon revenues that would suffer if oil prices continue to fall;
Algeria's five-year US$62 billion infrastructure overhaul, continuing through 2009, provides a strong stimulus for domestic growth and job creation. However, Algeria's investment will have a limited effect on Tunisia and Morocco due to low levels of regional economic integration.

Future Scenarios

North Africa is expected to outperform other regions in the short term, yet growth will slow:
Africa is expected to be one of the most stable regions in the short term in terms of economic growth with 2008 and 2009 projected real GDP growth of 5.2% and 4.7% respectively;
The IMF October 2008 forecast predicted Morocco to grow by 5.5% in 2009, Algeria by 4.5% and Tunisia by 5.0%. However, as the scale of the global crisis becomes apparent, these forecasts may be optimistic. The World Bank's December 2008 outlook predicted real growth in 2009 at 3.8% in Algeria, 4.0% in Morocco and 3.7% in Tunisia;
Among the three economies, Tunisia is the most vulnerable because of its high dependency on exports to Western Europe. Algeria is the least vulnerable as its hydrocarbon exports will continue to sustain growth, albeit at a slower pace.