Revenues from the oil sector will continue to play a pivotal role in buffering the Middle East and North Africa (Mena) against fiscal shocks that may be triggered by volatile global economic conditions, according to Saxo Bank’s chief economist.
Despite being hit by populist uprisings in 2011, the Mena region could see its economy expanding by 3.5 per cent this year buoyed in part by robust oil prices and regional government spending, said Steen Jakobsen, chief economist at the Copenhagen-based investment firm.
“To some extent, I think that’s [both] good news and bad news. I don’t foresee oil prices going massively down, but I see that every time I come here the public sector remains the dominant force in driving growth,” he said in an interview with Alrroya.com.
Jakobsen believes that handing over some of the investment activities to the private sector will help governments, especially in the Gulf region,
lessen the burden on public resources.
“This area has been very good and very attractive for short-term funds, but if you want to be able to have long-term capital, you need to have long-term commitment not only [from the governments] but also the investors coming in,” he said.
In their Q1 2012 Financial Outlook published last week,
Saxo Bank predicted
Qatar to continue to be the most bullish economy in the Mena region this year with a GDP of six per cent. While that growth rate may be significant considering the current market conditions, it is undoubtedly a far cry from the country’s double-digit rates recorded in recent past years.
The current economic climate – highlighted by a still unresolved Eurozone economic crisis, slow global recovery and rising social tensions – will continue to put pressure on the fiscal performance of many countries, the bank said.
Without any nation immune to the ongoing financial challenges, Jakobsen forecasts global economic growth in 2012 to be subdued at three per cent.
Greece ‘likely to take a vacation’ from euro
The Eurozone, burdened by a mountain of sovereign debts, has kept the world in financial jitters since 2009. And since a concrete resolution to the crisis remains elusive, the region will continue to pose serious threat to world economic recovery.
Saxo Bank’s Jakobsen believes that despite the single-currency region’s commitment to solve the debt problem, some of the troubled countries will most likely default and face bankruptcy.
“I think that by the second or third quarter of this year, there will be what I call the meeting of the cardinals, a final meeting where [leaders of the Eurozone] will set everything straight. In that meeting, two things will happen: first is that
Greece and most likely Portugal will probably take a vacation from the euro; second is that Germany will finally embrace the Eurobond and move from being skeptical to [being] constructive,” he said.
Indications of this trend, Jakobsen explained, could be seen at the forthcoming Brussels summit on February 6, which holds huge significance in mapping the fate of the beleaguered region.
“From an economist’s point of view, the meeting in Brussels on Monday does not have any financial value. But it does have a lot of political value. Why? Because now German Chancellor [Angela] Merkel can [rally] Germany to go away from [their] skeptical view of Europe and embrace the fact that we need Europe to stay together. We need to do something that is proactive rather than reactive,” he said.
Alternative energy could be the next big thing
Industrial dependence on fossil fuels could be challenged by a gradual shift towards renewable or alternative energy in the near future amid growing global initiatives to find a more sustainable source of power.
Saxo Bank’s chief economist believes that investments in alternative energy will likely see an uptrend within the next three years.
“There are two things happening in the United States. They have the highest benchmark standards for [gasoline] consumption per gallon, which will drive the car industry to be competitive and probably [outperform] most countries shortly. Basically, US cars are coming back,” Jakobsen explained.
Another factor that proved beneficial to the alternative energy industry is the US military’s recent plan to diversify its energy resources by using a mix of fossil fuel and biofuel in their operations.
By 2020, the US military intends to have 50 per cent of their energy supply from renewable sources. Likewise, they also plan to reduce by 50 per cent their use of conventional fuel in their non-combat vehicle by 2015.
According to media reports, the US military’s decision to reduce their fossil fuel consumption was spurred by both security and financial reasons. The Pentagon, which is the largest consumer of oil in the US, wants to have an assured access to energy supply.
Likewise, oil price volatility has proven to have a massive impact on its budget allocation where officials estimated that even a $1 (Dh3.67) increase in oil price per barrel could cost the US Navy an additional $30 million a year.
Jakobsen said that these are good indicators because the renewable energy market is assured of at least one very credible buyer of alternative energy.
“So I presume and assume that inside the next three years, there will be more happening in the alternative energy space than in the last 20 years because the US military will set a standard,” he said.
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