Eurasia Press & News
The two countries in the Middle East with the highest growth expectations for 2022 are Israel and Egypt. Fitch Solutions estimates that MENA-wide GDP will grow by 3.6% in 2021, after a contraction of 4% in 2020. Egypt and Israel are the only countries within the region expected to grow their economies beyond the size of their pre-COVID-19 levels for 2021.
These two states have pursued drastically different COVID policy prescriptions when it comes to lockdowns and vaccination rollouts. Israel and Egypt represent contradictions in growth policy and government management of the pandemic. Israel has one of the highest global vaccination rates at 60% of the population. It has weathered a series of mobility restrictions and mandates proof of vaccination for access to businesses and services. Egypt, however, is a freight train in that its positive growth continues to rely on the steady roll in the demographic of its young consumer market, resilience of remittance inflows, and few government restrictions on mobility, despite a low vaccination rate (less than 3% of the population) and poor government delivery of public health services. The difference in the strategy for economic recovery from the pandemic in these states is striking and illustrates the divergent approaches within the region toward an investment-friendly climate and a commitment to human capital.
Growth in the MENA region this year as a whole looks weak, with some exceptions among the Gulf oil exporters given rising oil prices and expected expansionary fiscal policy. And like the Gulf states, the growth of the Egyptian economy relies on a continuation of project spending, much of it expansionary fiscal policy driven by state infrastructure investments. Egypt’s 2021-22 fiscal budget expands public investments by more than 50%. There are also increases to public health and education. While the state and many of its connected contractors (including the military) drive capital expenditure, the growing population creates an insatiable market for basic consumer products.
The problem with this kind of growth model is that consumer spending will increasingly face headwinds of reduced subsidies, and lackluster job growth for young people will direct spending toward immediate needs rather than investment in technology and tools that might help individuals grow a business or learn a new skill. Egypt’s budget balance is expected to remain in a deficit through 2025, building pressure for more austerity measures and limitations to social safety nets, exacerbated by dominance of an informal labor market that makes targeting assistance and measuring need all the more difficult. Egypt’s growth is a function of survival consumption and large projects, yet the gains from both do little to facilitate long-term growth in human capital or new industry. With a youth demographic that is more than half of the total population, the trajectory is unsustainable.
In Israel the government has targeted COVID recovery stimulus to businesses and the pandemic spurred technology investments in the private sector. Israel has its own challenges in job creation for young people, but it has demonstrated that its investment climate can withstand a very challenging year. 2020 saw capital investment across the Middle East and Africa reach only half its level of 2019. Israel attracted $1.9 billion of new capital investment in 2020, followed closely by Egypt with $1.4 billion. But Israel is the second-largest source of greenfield foreign direct investment from the Middle East measured by outbound projects, close behind the UAE. Israel deployed $2.7 billion in new capital investment externally in 2020, while Egypt mustered just $300 million. The ability to attract investment is as important as creating engines for growth to deploy abroad, connecting an economy and its citizens to opportunity. And in a year in which business connections and networking were extremely limited by mobility restrictions, Israel’s lockdowns did not seem to break its entrepreneurial ecosystem.
The current threat of COVID variants and new mobility restrictions will again test public health systems and the resilience of economic growth strategies that rely on a large, young population to sustain consumption. For many emerging market economies, especially those in the Middle East, the next phase of the pandemic with the Delta variant and low vaccination rates will create higher rates of infection and sickness among normally healthy young people, and inevitably more pressure for mobility restrictions and business closures.
What was a gamble strategy in 2020 and 2021 to limit lockdowns may not be feasible again. The survival strategy of high population, high-growth emerging markets relying on young consumers and government contracting is not likely to sustain the same momentum in 2022. The endgame for COVID is the same for longer-term economic growth: more investment in people, their health, and their potential.
