beyondbrics

By Valentina Romei and Ranjit Lall

What are the economic trends behind the wave of political unrest currently sweeping the Arab world? And what are the implications of the turmoil for the regional – and indeed global – economy?

This week’s beyondbrics chart (after the break) contains a feast of information about the economies of North Africa and the Middle East – from recent growth levels to shares of world oil production – offering some important, and often surprising, answers to these questions.

The horizontal axis measures the countries’ average annual gross domestic product growth from 2005 to 2010, while the vertical axis plots their contribution to world oil production in 2009 (as a percentage of total production). The size of a country’s bubble is proportionate to the size of its GDP in 2010, and the colour corresponds to its rate of inflation in 2010 (the darker the colour, the higher the rate).

A striking trend is that the two countries suffering from the worst unrest in recent weeks – Tunisia and Egypt – experienced rapid price rises last year. Inflation hit 4.5 per cent in Tunisia and an astronomical 11.7 per cent in Egypt, the highest level in the region.

It is perhaps no coincidence, then, that the countries believed to be most likely to next face political protests have also seen high levels of inflation. In Algeria, Jordan and Lebanon prices rose by 5 percentage points or more in 2010. Worryingly, in politically fragile Yemen inflation hit 9.8 per cent.

Surprisingly, the crisis-wracked countries have also seen strong growth in recent years. As shown by the chart, the Egyptian economy expanded an average 6.2 per cent per year over the past five years, one of the highest rates in the region. Tunisia grew at a more modest but still respectable 4.7 per cent.

According to Dina Ahmad, FX strategist at BNP Paribas in London, this underlines the fact that the latest protests are not only driven by economic concerns:

Inflation and high unemployment clearly contributed to the outbreak of the turmoil, but they were only catalysts. The protests are about political repression, and people are demanding regime change. This is why strong growth hasn’t prevented them. In some cases, it has actually fuelled the economic trends – such as inflation – that sparked them.

Whatever the causes of the unrest, though, its economic impact on North Africa and the Middle East is likely to be significant. Disruption to the Egyptian economy could be particularly damaging. With a nominal GDP of $217bn in 2010 (as represented by the sizeable bubble in the chart), it is the third biggest in the region.

As well as being a vital source of energy, textiles and metals for Arab countries, Egypt is an important market for their exports, absorbing some $4.1bn of goods and services from the region in the first half of 2010.

Among Egypt’s trade partners, however, it may be European countries that suffer the most. The European Union is the biggest source of Egyptian imports, running a trade surplus of almost $7.5bn with the country in 2009.

Mercifully for the EU and the rest of the world, Egypt is not a major exporter of oil. As the chart shows, the country accounts for a mere 0.8 per cent of global oil production. Not that this has stopped oil prices soaring to more than $100 per barrel in reaction to the protests.

“The spike in oil prices is not the result of a supply shock, but mainly due to Egypt’s control over the strategically important Suez canal, through which much of the Middle East’s oil reaches Europe,” says Ahmad. “Fear of contagion to the major oil producers in the region has also pushed prices up.”

Oil importers across the world will be especially nervous about the prospect of the contagion reaching Saudi Arabia. Accounting for 11.7 per cent of global production, as shown by the chart, the country is the world’s biggest oil producer. Given the monarchy’s seemingly limitless ability to buy off malcontents, however, most believe that the probability of turmoil breaking out is slim.

But even in the more plausible scenario that trouble spreads to one of the region’s other large producers – such as Kuwait, which accounts for 3.4 per cent of global production – international oil prices could become crippingly high.