Middle East and North Africa2007 Economic Developments

and ProspectsChallenges and Opportunities

for the UAEMustapha K. NabliChief Economist

Middle East and North Africa RegionWorld Bank

Dubai, June 5 2007

2006 was another year of robust economic growth in MENA

• Strong economic growth in MENA for the fourth year in a row

• Growth driven by oil revenues, ongoing recovery in Europe and policies broadly in the right direction

• GDP in MENA (exc. Iraq) increased by 6.3 percent up from 4.6 percent in early 2000s

But significant differences among sub-groups and countries

• Resource poor labor abundant grew by 5.6 percent

• Resource rich labor abundant grew by 4.3 percent

• Resource rich labor importing grew by 7.5 percent

Regional growth steps up to 6.3% in 2006

2

4

6

8

1996-1999 2000-2003 2004 2005 2006

RPLA

RRLA

RRLI

MENA excl IRQ

Source: National Agencies and World Bank.

real GDP growth, percent

General step-up in growth for MENA oil exporters in 2006

real GDP growth, percent

0 3 6 9 12

IranSyria

RRLAYemenAlgeria

QatarUAE

LibyaRRLI

BahrainOman

KuwaitSaudi

20052006

Source: National agencies and World Bank estimates.

On a per-capita basis much better performance than in the past

• Per-capita growth was 4.2 percent, the highest level recorded in at least two decades, up from 1.7 percent in 1990s

• MENA’s per-capital income is now growing at 75 percent of the rate attained by other developing regions, up from 61 percent in the 1990s.

Surge in oil revenues underpins growth of MENA exporterscrude oil and product revenues $bn [left]; oil price, WB $/bbl [right]

50100150200250300350400450500550

2002 2003 2004 2005 200625

30

35

40

45

50

55

60

65RRLA revenuesRRLI revenuesOil Price

Source: UN Comtrade, IMF, IEA, World Bank.

There is a shift in domestic demand in favor of investment

• The contribution of gross investment to growth almost doubled in 2006 to 4.1 GDP growth points

• Private investment as a share of GDP reached almost 16 percent and is increasing for all sub-groups

• FDI is low but growing particularly in resource poor countries

• Imports of capital goods significant

Private investment as a share of GDP

10

11

12

13

14

15

16

2000 2001 2002 2003 2004 2005 2006Source: National Agencies and World Bank.

RPLA

RRLA

RRLIMENA

Fiscal balances improved but not everywhere

• Fiscal deficits for resource poor countries declined from 6.7 percent of GDP in 2005 to 6 percent of GDP in 2006. Lebanon, WBG and Djibouti deficits expanded.

• Fiscal surpluses for resource rich labor importing countries improved to 25. 8 percent of GDP. All improved.

• But for resource rich labor abundant countries they declined to 3.1 percent of GDP.

-10

0

10

20

30

40

50

Kuwait UAE RRLI Saudi Oman Algeria RRLA Iran

2005

2006

Source: National Agencies and World Bank. *selected economies.

RRLI fiscal surplus continues at high levels

fiscal balance as a share of GDP %

Labor markets are more dynamic

• High economic growth has gone together with:

– Strong employment creation– Declining unemployment rates– Strong labor force growth– Increasing labor force participation rates,

particularly among women

Summing up MENA’s labor marketstory, 2000-2005

Includes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, SaudiArabia, Tunisia, United Arab Emirates, West Bank and Gaza.

2.8

3.6

4.55.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

WAP LF JOBS GDP

Unemployment declining

• Between 2000-05 MENA’s aggregate unemployment fell from 14.3 to 10.8 percent (for the 12 countries in the sample)

• This took place at the same time that the region is experiencing the crest of the labor force growth path

Most progress in the largestcountries

0

5

10

15

20

25

30

35BH

R

QTR

SAU

EGY

MO

R

IRN

TUN

ALG

KWT

UAE

JOR

WBG LB

N

YMN

IRQ

2000 2005

Falling unemployment rates

Increasing unemployment rates

What kind of new jobs?

• Mostly created in the private sector as public employment demand slows down

• New jobs primarily in services and agriculture

• Productivity remains low but some promising sings of more employment within sectors with raising productivity

Most new jobs are in the privatesector

Contribution to total employment growth (in percentage points)

-0.1 -0.2

2.2

2.3

3.7 3.2

1.9

4.2 3.6

0.3

0.20.4

2.5

-1

0

1

2

3

4

5

6

7

MO

R

IRN

SAU

JOR

EGY

ALG

Work at HomePrivatePublic

The services sector has been leading jobcreation except in Morocco and IranContribution to employment growth (in percentage points)

1.9 1.9 1.4

-1.4

0.5

1.5

0.6

0.82.1

1.9

2.53.6

1.4

0.9

0.00.4

0.3

0.40.8

0.1

2.5

-2

-1

0

1

2

3

4

5

6

7W

BG

MO

R

TUN

IRN

EG

Y

JOR

ALG

Agriculture Industry

Services Work at home

Quick Update on The United Arab Emirates Economy

UAE recent economic performance remains strong

46%46%42%44%Oil share of exports151.1118.790.253.9Total Merchandise Exports bn $

69.855.038.123.5Oil (crude & refined) Exports bn $

as % GDP

16.115.79.98.6Current Account Balance

27.020.610.58.9Overall Fiscal Balance

19.721.824.932.3Fiscal Expenditures46.742.435.441.1Fiscal Revenues 89.791.086.975.8Exports (Goods & Services)

9.78.59.77.1Real GDP Growth2006 e200520042000-03

UAE and the Developing World (2006)

3.78.26.44.04.02.3Real GDP per capita Growth

1.97.00.819.932.016.1Current Account (% GDP)

1.9

6.4

ECA

-1.1

9.1

EAP

0.713.725.927.0Fiscal Balance (% GDP)

5.06.27.49.7Real GDP Growth

LACMENAGCCUAE

Is this a new era of opportunities?(1) Global prospects

• Positive prospects for oil revenues

• Positive global growth prospects

• Asian potential

Favorable Oil Market Conditions likely to persist in near term

• Oil prices expected to stay high gradually declining to $50/bl by 2009 (WB average)

• World oil demand growth increasing to 2% by 2009 (up from 1% in 2006)

• But non-OPEC supply share expected to increase

WB average oil prices

0

10

20

30

40

50

60

70

2000-2004

2005 2006 2007 2008 2009

World Bank avg oil price

Growth in oil demand

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

2000-2004 2005 2006 2007 2008 2009

Perce

nt

World demand OECD demand Developing demand

-1

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Global Economic ProspectsWeaker but still robust

Real GDP annual percent changeForecast

Developing

High-income

2009

Developing ex. China & India

Developing countries GDP growthstill robust

0

2

4

6

8

10

12

2000-04 2005 2006 2007 2008 2009

Developing countries China Other East Asia and Pacific Europe and Central Asia

US Libor rates to remain around 5 percent

0

1

2

3

4

5

6

2000-04 2005 2006 2007 2008 2009

US Libor - 6 months US 10 year T-note

Is this a new era of opportunities?(2) Domestic country prospects

• Progress on economic reforms – Private sector investment– Exports and integration into the global

economy– Diversification of production/exports

• But weaker than in the rest of the world

Business Environment Index: UAE behind other MENA countries

0102030405060708090

UAE KSA Oman Yemen Kuwait MENA OECD

2006 rank (100 = best) 2003-2006 Reform Index (100 = most improved)

Mixed Results for Business ClimateDoing Business 2006

05

10152025303540455055606570758085

Start up (number ofprocedures to

register)

Closing businesscost (% of estate)

Registering property(% of value)

Cost of start up(%GNI per capita)

UAE GCC MENA High Income World

Governance Reform Indices

• Historically, oil booms delayed implementing deeper reforms

• Today, early signs show mixed results with respect to governance reforms in UAE 100 reflects most efficient (best ranked) or best reformer.

Reform is between 2000-2006

Reform Index

2006 Rank

Reform Index

2006 Rank

47914990OECD

50505050World

MENA

UAE

63205749

8420865

Public sector accountability

Quality of public sector

administration

Is this a new era of opportunities?(3) Regional prospects

• Potential for matching of availability of investment funds (from oil exporters) and good opportunities for investment in non-oil exporters?

• The UAE appears to be leading in this process?

Record flows of foreign direct investment to the region during 2006

$ billions

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Source: National agencies, IMF, UNCTAD, World Bank.

Note: RPLA = resource-poor, labor-abundant (countries).

Total FDI

RPLA FDI

But there are major challenges: (1) The employment challenge:

quantity vs quality of jobs

MENA will continue to face very high labor force growth in the near future

But they need to be better quality jobsHigh sustained economic growth will be

needed to meet labor force growth andtackle unemployment

How about the UAE?

But the job creation challengecontinues to be high

Labor force growth, MENA and other developing regions, 2000-2020.

EAP

ECA

LACSA

SSAMENA

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000-2005 2005-2010 2010-2020

% g

row

th p

er y

ear

Job creation needed to reach different goals for employment rates

68

81

99

0

20

40

60

80

100

120

Current scenario: 60 percent EU current: 64 percent EU goal: 70 percent

Employment rates by 2020

Jobs

nee

ded

by 2

020

Is there a trade-off between quantity and quality? Labor productivity growth and job growth in subsectors, Ireland, Tunisia, and Morocco

-4

-2

0

2

4

6

8

10

12

14

-6 -1 4 9 14Productivity growth

Empl

oym

ent g

row

th

Ireland 1995-1999: positive relationshipTunisia 1997-2001: negative relationshipMorocco 1999-2003: negative relationship

Labor Market in the UAE

7.89.5

8.08.0

GDP Total growthGDP non-oil growth

9.0Employment growth

39(2005)

36(2000)

26(1990)

Female LF participation

2.32.87.67.0Labor force growth

2.02.36.75.7Population growth

2010-2020

2005-2010

2000-2005

1990-2000

But there are major challenges: (2) Medium term: Managing a soft

landing?• Has the economy been overheating?• Softening of growth needed?• Managing the financial risks: financial

bubbles, real estate bubbles

GCC equity markets stabilized but showing little new dynamic

MSCI-price indices in USD June-01-2006=100.

40

60

80

100

120

140

160

180

Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07Source: Morgan-Stanley through Thomson/Datastream.

GCC

Saudi Arabia

Kuwait

UAE

All emerging markets

But there are major challenges: (3) Longer term: Managing the oil

revenues?• Oil revenues are likely to remain high due

to oil market conditions• Investment vs. consumption of the windfall

revenues• Productive investment and transformation

of oil wealth into other sustainable wealth• Diversifying inside and outside the region:

– The Arab region– The Asia potential

Potential offered by the globalization of corporate finance

• Equity finance

• Bond finance

0

15

30

45

60

75

2002 2003 2004 2005 2006

$ billions

OtherCountries

China

Record expansion in IPO transactions led by China

$71 billion

Capital raised through Initial Public Offerings (IPOs) by companies in developing countries

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 2004 2005 2006

Corporate

Sovereign

$ billions

Bond issuance by developing countries

$88 billion

$43 billion

Corporate bond issuance now exceeds sovereign borrowing