Agenda

1. Agenda • MENA Instability & Spillovers • Regional & Global Implications of the Arab Firestorm • Addressing MENA Vulnerabilities • Policy Agendas for Transformation & Stabilisation: Domestic, Regional, International & Role of EU and US

2. MENA Regional Developments • Period of momentous change, challenges and opportunity that can lead to a historical shift in growth & development patterns • Prior to recent events the pace of economic activity was set to continue to recover in the MENA & GCC region after the Great Recession & Great Financial Crisis • MENA Growth is expected at 4.1% in 2011 compared to 3.8% in 2010. • Sharp divergence of growth prospects between MENA Oil Exporters and Oil Importers • Oil Markets & Financial markets have factored in higher risks emerging from recent developments • Transition period & its management will be critical to outcomes • EU-US-China-Korea-GCC have Strategic interest in smooth transitions & avoidance of ‘failed States’: policy action required

3. Arab World: Divergent Growth Patterns, Rising Inflation Source: IIF Regional Overview May 2011

4. MENA Regional Turmoil => Increased Divergence Source: IIF May 2011 Divergence to increase b/n oil exporters, oil importers & labor exporters • GCC growth - boosted by high oil output & prices; Bahrain’s protests will impact growth in 2011 while in KSA, growth will be boosted by the populist fiscal measures. • Downside risk remains that private sector activity will be subdued/crowded out.

5. Reactions to Turmoil: Equity Markets Index, Nov 1, 2010 = 100; Nov 1, 2010 – 31 May 2011 MENA Oil Importers MENA Oil Exporters Source: Bloomberg Note: 1/10 – Tunisia; 1/24 – Egypt; 2/15 - Libya

6. Reactions to Turmoil: Higher CDS spreads CDS spreads (in bps) Oct 26, 2010 – May 31, 2011 MENA Oil Importers MENA Oil Exporters Source: Bloomberg Note: 1/10 – Tunisia; 1/24 – Egypt; 2/15 - Libya

7. Reactions to Turmoil: FDI, Tourism & Borrowing costs Tourism Receipts(Percent of GDP) Sovereign Spreads(Basis points) Source: IMF – “Middle East and Central Asia – REO”, April 2011, DIFC, Dubai

8. Food Prices & Political Instability • Food price inflation increases likelihood of civil conflict and civil strife • Food price inflation can have severe socio-economic & political effects in emerging countries, well illustrated in recent events in rioting, demonstrations & political changes in MENA countries. e.g. In Egypt, food represents 40% of household budgets & food price inflation hit 20% resulting in near 10% decline in purchasing power. • Higher Fuel & Food prices will add import cost of some 3% of GDP for Egypt, Lebanon, Jordan, Morocco, Syria, & Tunisia • “Inflation targeting” cannot neglect food price inflation: Inflation cannot be dealt purely through monetary policy. • Macroeconomic policies cannot be shaped in isolation from measures to ensure social safety nets are in place and that the poorest people are protected.

9. Agenda • MENA Instability & Spillovers • Regional & Global Implications of the Arab Firestorm • Addressing MENA Vulnerabilities • Policy Agendas for Transformation & Stabilisation: Domestic, Regional, International

10. Higher Oil Prices can Derail Economies • Three of the past five global recessions have been triggered by a Middle East geopolitical shock that propelled oil prices skyward! • Higher Oil prices leading to: • Rise in commodity & food price inflation, exacerbating effects of diarrheal monetary policies in advanced economies (US, EU) • Larger Budget & Trade deficits can derail fragile jobless recovery in US, EU • In the short term, oil prices could spike due to: the fear premium of political contagion, possible effects on oil production and transportation networks, a surge in precautionary stockpiling of oil and other factors. • This could, in the worst case scenario lead to stagflation, a combination of rising inflation and recession. It will certainly increase inflation and reduce growth in energy- and commodity-importing countries. • In the medium term, it is likely that new governments in oil producing nations would seek to maintain oil production and export earnings, suggesting an eventual return to equilibrium.

11. Oil Price & Unrest in the MENA region Source: Bloomberg

12. Maritime chokepoints critical to petroleum markets Source: EIA Note: Circles represent millions of barrels per day transported through each chokepoint. Arrows represent common petroleum maritime routes Maritime transit chokepoints are narrow channels along widely used global sea routes. Because about one half of the world's crude oil supply is moved by tankers on maritime shipping routes, world oil transit chokepoints are a critical part of global energy security.

13. Other Impacts of MENA Turmoil • Risk aversion rising: higher short-term economic and financial volatility, and likelihood of a correction in price of risky assets • Sovereign Asset Freezes: increases perceived riskiness by SWFs of investing in advanced economy assets • Lower MENA growth resulting in lower growth of EU exports to MENA • Energy transport infrastructure security & energy supply vulnerability: • Oil chokepoints are critical part of global energy security, whose blockage leads to a substantial disruption in energy markets. • Straits of Hormuz, Suez, Bab-el-Mandeb and Malacca are world’s biggest maritime chokepoints critical for petroleum markets with strategic geopolitical importance.

14. Wider Implications of the “Jasmine Revolution” • Spill over into GCC & oil producers, Africa, Central Asia • Arab uprisings will likely result in a change in strategic alliances affecting traditional role & influence of US and Europe whose political capital & moral authority have been damaged by Iraq, Afghanistan wars & support of Israel. • China and Turkey likely to be strategic gainers • Turkey’s strategic outlook is gradually shifting towards the ME, while accession to the EU has not resulted in major developments • MENA - China trade increased close to 100 times over to $175bn in 2010 from $2.3bn in 1990 (Middle East countries account for almost 90% of the trade) • Economic & Geostrategic landscape of MENA shifting toward more regionalism (GCC inviting Morocco, Jordan) and East

15. Agenda • MENA Instability & Spillovers • Regional & Global Implications of the Arab Firestorm • Addressing MENA Vulnerabilities • Policy Agendas for Transformation & Stabilisation: Domestic, Regional, International

16. Potent Mixes: Young Population & Youth Unemployment Source: UN Population Division, DIFCA Economics

17. Female Labour Force Participation Remains Key • FLFPR lower in MENA than in countries with similar income/wealth levels • Higher LFPR in MENA could raise GDPby about 20-25%! Source: World Bank database, DIFCA Economics

18. MENA Vulnerabilities: Demographic, Political & Economic Source: DIFCA Economics

19. Policy agendas for transformation & stabilization: domestic, regional, international DOMESTIC • Political Transformation • Governance • Social Safety Nets • Educational Transformation • Women Empowerment • Fiscal Transformation • Economic Diversification • Job Creation REGIONAL • MENA Bank for Development & Reconstruction • GCC Common Market & Common Currency • Regional Economic Integration • Develop Local Currency Financial Markets • Shift Economic Policy Toward Asia & EMEs INTERNATIONAL • Resolve Israel-Palestine Cancer • Aid • Trade • Investment • Economic Focus not Military Engagement

20. Concluding comments I • Period of Transformation for MENA: Transition & its Management will be critical to outcomes • International consequences: oil price surge, spill over to food prices, increased energy insecurity & risk aversion in financial markets. • MENA regional turmoil spillovers: increased regional divergence, plunge in equity markets, lower tourism & FDI and higher risk premiums & borrowing costs. • Not a “Berlin Wall” Moment but Arab countries will need to ‘own’ their transformations and be “able to clean up their own backyard” • Geostrategic implications will include change in global strategic alliances with new players like China, Turkey and others gaining importance.

21. Concluding Comments II • Vulnerability indicators + underlying conditions => Firestorm conditions are present in other countries e.g. Central Asia has a similar set of crucial preconditions. • MENA countries Need to address Demographic, Political & Economic Vulnerability Factors: Need Growth to be both inclusive and has a trickle-down, “pull up” effect. • EU, US will need to support the transformations taking place, they cannot manage the transformations • EU, US Policies on MENA Trade, Aid, Immigration, Arms & Military intervention need to be revised • Addressing vulnerability underlines the importance of Job Creation, lowering income inequality and promoting growth & development through institutional reform and improved governance • Set-up a MENA Bank for Reconstruction and Developmentnot a ‘Marshall Plan’

22. Grazie Thank you nasser.saidi@difc.ae