There are few places where Europe’s faltering economic recovery will be more closely watched than in the Maghreb. Through exports, tourism and migrant remittance flows, the countries of the region are critically reliant on relations with their EU neighbours across the Mediterranean.
Yet despite the problems besetting western markets with which they are closely linked, North African economies have so far escaped the worst of the global crisis.
Algeria and Libya were sustained by the continued strength of their oil and gas revenues and, when energy markets dipped, by lavish government spending. But Morocco and Tunisia also demonstrated striking resilience, thanks to strong domestic demand, a diverse productive base and improving industrial competitiveness.
Overall, the region notched up real GDP growth of 3.6% in 2009. It could do even better this year, especially if European consumers regain the confidence to shop and travel. Moreover, in no country was expansion driven by the kind of financial or property market bubble that has burst in other emerging markets.
Financial systems across the region are mainly bank-based and not heavily reliant on inflows of portfolio investment or credit from the world financial system. This may be viewed as under-development in some respects, but it did help to shield the Maghreb states from the worst impacts of the global liquidity squeeze and banking crisis.
But beyond the reassuring headline facts of the Maghreb’s solid performance over the past several years, serious challenges remain to be confronted. Regional integration is strikingly under-developed, by comparison with the European Union but also sub-Saharan West Africa or the Arab Gulf.
The Institute of International Finance (IIF) points out that in 2007–08, intra-regional trade between the four Maghreb states amounted to just 2% of their total merchandise trade, one of the lowest rates in the world for a geographically contiguous group of states. Tariffs have been widely reduced, but there are still many non-tariff and regulatory obstacles to cross-border business. Difficulties are compounded by the chilly state of political relations between Algeria and Morocco, the two most populous markets; this hinders the flow of business and travel, and cooperation on regional issues.
For example, Morocco has been excluded from a new Algerian-led partnership with West African countries to enhance security in the Sahara (where problems such as people and goods smuggling and Islamist terrorism have a clear economic development impact). Some progress has been made in preparing an action plan of financial sector reforms, such as the harmonization of regulation, statistics and payment systems. But there is a long way to go.
The weakness of economic partnerships with their neighbours leaves individual Maghreb countries heavily dependent on internal demand and on their relationships with Europe. “The stronger the recovery in Europe, the better it is for Tunisia and Morocco. It all depends on what happens in the euro zone, because of their reliance on EU imports and tourism,” says Garbis Iradian, senior economist for Africa and the Middle East at the IIF.
With a population of only 11 million, Tunisia has based its development strategy on heavy investment in education, the emancipation of women and the creation of an efficient business infrastructure, to support a competitive trading economy that is built around a close trading partnership with near neighbours in Europe.
The country hopes to extend its association agreement with the EU to encompass services, and it is also seeking to deepen modernization at home further, through measures to promote industrial diversification and efficiency, funded in part through direct foreign investment – which reached E283 million in 2007, half of it focused on industry.
Economic stability is further underpinned by self-sufficiency in oil. But the country is now starting to encourage the development of a modern green economy, subsidizing consumers, for example, to install solar panels on their homes.
Morocco – with 32 million people but still major basic development challenges – is more inward looking. “Tunisia is a small economy that is strongly oriented towards export, whereas Morocco is a large and highly diversified economy whose focus is essentially domestic,” says Anouar Hassoune, senior analyst at Moody’s, the investment rating agency.
And while Morocco was the first Maghreb state to take action to strengthen banks with a crackdown on bad loans, Tunisia has now followed suit. “Tunisia has made impressive progress in reducing non-performing loans, from an average 40% of bank lending portfolios five years ago to a mere 15%,” says Hassoune.
Agriculture remains a major source of income and livelihoods, although output in the sector is volatile because it is exposed to the risk of drought. But the domestic industrial and services base is also a key driver that has helped to sustain Morocco through the global crisis.
A crucial strength is the structure of the banking industry. The kingdom’s government has resolutely ignored the international fashion for developing financial services hubs, and limited the range of banks to what was necessary to cater for the local economy.
“Morocco was the first Maghreb state to embark on reform of its banking sector. The central bank has been cautious about approving licences, and the market is dominated by about 10 banks that are highly liquid, thanks to an inflow into the economy of privatization revenue between 2003 and 2008, tourism income and more than E5 billion a year in remittances from Moroccans working abroad,” says Hassoune.
“This has allowed Moroccan banks to maintain lending throughout the global credit squeeze, to meet the domestic demand for credit – which is strong in an economy where most businesses have a relatively small base of shareholders’ funds.”
The Moroccan model is not without its shortcomings. The country may be over-reliant on bank financing, while equity investment is relatively undeveloped – there were no initial public offerings on the Casablanca stock market last year.
This problem has been implicitly acknowledged by policy-makers with a recent decision to merge ONA – Morocco’s most strategic conglomerate, controlled by the royal family – with its parent group and then float off dominant stakes in its key subsidiaries on the Casablanca exchange.
There is also a recognition of the need to strengthen the competitiveness of the economy and its technological focus. “Morocco would gain tremendously from jumping on the bandwagon of technological innovation and change, by revitalizing higher education and research and developing a national roadmap for green growth,” the country’s Royal Institute for Strategic Studies argues in a recent policy paper.
STATIST MINDSET
Whereas Morocco’s strategy is based around a mixed economy, with a big role for the private sector and a strong commercial outlook even for nationally owned groups, Algeria remains fundamentally statist and nationalist in outlook.
Although some companies have been privatized, the country’s socialist history is still deeply felt. The economic foundations are gas and oil, and the public sector. The expansion of gas exports has sustained growth and allowed the government to pay off almost all international debt.
Several years ago, the country was on the verge of liberalizing oil and gas investment, to give foreign energy companies a more dominant role. But at the last minute it pulled back, choosing to risk disillusionment among foreign investors rather than surrender national control of a strategic asset.
Foreign direct investment is still tightly regulated. A cause of particular wariness among international investors is the state’s insistence on a pre-emption right if an investor chooses to sell out; the government has on occasion been ready to take punitive action against investors when it dislikes their decisions on the disposal of assets, and this has badly shaken the confidence of foreign businesses.
Even so, in broad macroeconomic and financial terms, this approach has allowed Algeria to plough through the recent global downturn almost unscathed. Growth last year was 3.5%, and it was particularly impressive – at 7.6% – in the non-hydrocarbon sector, boosted by a $150 million programme of infrastructure investment.
But while this approach has sustained growth, it has not delivered major improvements in living standards or public services, or created the jobs that are needed for a fast-growing youth population.
One regional specialist estimates that internal liquidity in Algeria stands at $250 billion. But the banking system acts mainly as a repository for savings rather than as an effective vehicle for financial intermediation; the huge mountain of deposits is not translated into the retail business and personal credit that could stimulate economic activity and the creation of prosperity and employment at the local level.
“Most growth in Algeria – and Libya – is driven by domestic spending while the private sector is lagging behind. Most of the banking sector in these two countries is still in public hands,” says the IIF’s Iradian. “How long will the growth last? They have to slow down. This growth is not sustainable.”
But while there are long-term challenges, Algeria and Libya can feel vindicated that the energy sector and the maintenance of a large public sector have spared them from heavy reliance on investment, and helped to carry them through a period of crisis in the world economy relatively unscathed.