The effects of MENA political turmoil

Helge Pedersen-Economist, Nordea Bank
There is no doubt that the unrest in Egypt, Tunusia and Libya will affect the economic prospects of the region negatively in the short term. There are considerable production disruptions, loss of vital export earnings, and general uncertainty about what the future holds. I estimate that growth in countries could be between 2% points and up to 25% points lower in the countries involved, with Libya as the hardest-hit nation.
It is hard to come up with concrete bids for the consequences of the turmoil in the MENA region for the world economy. There is no doubt that growth will be lower due to higher oil prices, but I believe and hope that the recovery will nonetheless prove to be self-sustaining because the momentum of global demand seems to be very strong at the moment.
If the crisis is spreading to the far more important oil-producing Middle Eastern countries – such as Saudi Arabia, Kuwait, Qatar and the UEA – my view on the world economy will change fundamentally. In this worst case scenario there is a risk of a true price explosion that may bring up oil prices in the range of 150-200 USD barrel. This can in my view easily tricker a new global recession.
More rise in oil prices very much depends on how the crisis develops. If Ghadaffis regime falls soon and if OPEC countries stand firm on increasing the supply of oil I believe that oil prices fall back around $ 100 barrel.But in case of status quo in the MENA region and continued good prospects for the world economy this could lead to further moderate price hikes. It is also crucial for the oil price when the ECB and the Fed starts tightening their monetary policy. When that happens, the price will very likely could drop slightly because the more speculative investments in the oil market then is assessed to wane.

Sintje Diek-Oil analyst, HSH-Nordbank
It is necessary to distinguish between shortterm developments and consequences in the medium term. I do not expect that the actual riots that spread from Tunisia and Egypt to other countries in North Africa and the Middle East spill over to important oil producers like Saudi Arabia. I think the gulf states are too stable for a political revolution. Of course, that does not rule out that we see some demonstrations. The governments in the gulf states are supported by the police and the military and have the financial strength to expand welfare programms. But it is not excluded that I underestimate the political dynamics in these countries and that we see massive protests there, too. Nobody knows how the situation in the region will develop in the next months. That creates a lot of uncertainty which will lead to high oil prices. My forecast for the end of the second quarter is 110 USD/Barrel for Brent which does not rule out higher prices in the meantime. But I do not expect an oil crisis with oil prices up to 150 USD/Barrel and higher because of the limited vulnerability of the gulf states. Especially, Saudi Arabia has enough spare capacity to compensate for supply disruptions from other countries. For the medium term I can imagine that oil prices will decrease again, because the situation in North Africa and the Middle East will calm down gradually. Then the fundamentals play again an important role and they do not justify oil prices between 110 and 120 USD/Barrel. The recovery in the US will be slow and the economic development in China will be less dynamic (expected growth 7% per annum). For the end of the third quarter I expect Brent to stand around 100 USD/Barrel.
If there are massive protests in an important oil producer like Saudi Arabia which threaten the oil infrastructure oil prices will increase up to 150 USD/Barrel and even higher. The country is the second largest oil producer in the world and has the highest spare capacity of the OPEC. Unrest in smaller oil producers would not have such a massive effect on oil prices; nevertheless if the number of countries with riots increases that would lead to a destabilising of the whole region and could result in high oil prices above 120 USD/Barrel. If more countries are involved in the riots, there is less capacity to compensate for supply disruptions.

Banu Kıvcı Tokalı-Economist, Destek Securities
The direct impact of the chaos in North Africa and Middle East has been seen on the oil prices as a sudden rise. Infact the countries that live chaos are not the important ones in terms of oil reserves. But by taking into consideration that Libya produces high quality oil and there might be a risk of expansion of the chaos towards the region countries which are important in terms of reserves the global economy seems to be prudent.
High oil prices causes risks against the continuance of economic recovery and protection of price stability. So there might be a trend for central banks to put early steps for chasing tight monetary policies.
The most critical point is that if the high oil prices be permanent the secondary impacts of this situation must be observed and also it must be observed whether the central banks be in a trend to raise the interest rates or not. Especially if the central banks need to increase interest rates in a case of downward risks exist in economical growth that would affect the economies negatively. But the global economy is not at that point right now. Rise in the oil prices cause negative impacts on the Turkish economy as an oil importer country. Firstly the bill of oil payment rises. In the case of oil prices stay above $100 every $10 increase in oil prices might cause a $5 billion rise in bill of oil payment of the country. As a result current account fdeficit/GDP will rise 0.6%. If we take the oil price as $100 the bill will be $50.6 billion and if we take it as $110 the bill will be $56 billion.Inflation will be also affected negatively from the rise in oil prices. At the main scenerio of Turkey Central Bank the oil prices has been taken as $95 and in this case the inflation rate target is 5.9%. Every $10 rise in oil prices cause a 0.4 point rise in iflation rate. Oil price at $100 will cause the inflation up to 6.1% and if the price goes to $110 the rate will be 6.5%. I want to remind that the market’s inflation expectation is more than the target of central bank. My expectation is 6.8%. Rising oil prices also establishes a downward risk for the global growth. A $10 rise in oil prices might cause a half point desrease in global growth rate. This means Turkey’s export might have a negative impact from the rising oil prices. If the chaos expands to Saudi Arabia and the other gulf region countries the size of the risks will be huge. The rise in oil prices will be dramatically and more important thing is that the high oil prices will be permanent. In this scenerio, we might face a double dip in the global economy. But I want to point out that I don’t expect the chaos expand to the Gulf region countries.

Oral Erdoğan-Economist, Bilgi University
The social crisis brought about by the riots in North Africa comes as an addition to the already existing financial and economic crisis. A third crisis has been triggered by the catastrophe in Japan, which might have more destructive effects.
A pricing process driven by speculation rather than by the current supply and demand levels in energy; food; metal and raw-materials, has recently been increasingly dominant. The sharp movements in the prices of assets can affect production processes adversely. An expectation of stagnancy might cause the general demand, which is already under pressure, to fall back to crisis levels. In this case world governments — whose spending decisions have already come under questioning by the public– might need to take very hard savings measures in order to cover deficits in the future.
Global income distribution, which gets more unbalanced with each crisis, might worsen as a consequence of these events. Indirectly, when rising energy and food prices are combined with governments’ inability to take control in crisis regions, this might cause similar scenes to appear not only in the “problematic” regions, but across a much broader area. Naturally, public discontent might surface in places where the prices rises are felt only as increased costs but not reflected in people’s incomes. In short, the fragile social situation coupled with economic concerns might delay the recovery process and even cause a deepening of the already existing problems.
When we consider the external trade trends of Turkey, the country’s attempts to diversify exports — a process that had started before the crisis — seem to have been a good move. Problems that emerged in the European Union, Turkey’s biggest export partner, brought along by the last crisis, have demonstrated how proper a move diversifying exports has been. But it would be too optimistic to claim that we will not be affected by the developments in North Africa. This adverse effect will increase as the events spread to neighboring regions. To state it more clearly, our exports to the region rose to $7 billion in 2010 compared to about $1.5 billion in 2003. Egypt accounted for most of these transactions with $2.3 billion followed by Libya, where our exports amounted to $1.9 billion. These two countries account for nearly 60 percent of our exports to this region. Another significance of the region is that it is an area where we have a trade surplus. We had a $3 billion trade surplus in 2010, while in 2003, there was a trade deficit of $1 billion.
To consider the subject matter more clearly in respect to the shipping industry, it would be useful to have a look at the ships that travel to Turkish ports from Libya, Tunisia and Egypt, or at those which sail to these countries from Turkey. The number of ships from Turkey to these three countries decreased by 26.5 percent in February 2011 over February 2010.
When we evaluate the situation from a larger perspective as opposed to a regional outlook, we see that the volatility in raw material and energy prices increases concern about the future of Turkey, an important actor in global economy. The shipping industry is instantly affected by changes in energy prices or when there is a possible risk of stagnancy. Shipping is a sector where forward contracts are the norm and we should always be ready for the possibility of ambiguity being reflected sharply in prices. We are living in a time of intense competition, even if we could call this a post-crisis period. Competition coupled with the over-supply in the industry (caused by the continued investments of the countries that are strong in shipbuilding during the crisis) and increasing costs are delaying the recovery process. If on top of all these, there will be a fall in general demand, we can expect a new round of ship lay-ups (the rate of which reached as high as 12 percent during the crisis) and more ship breakups.
As for the specific influence of the developments in the region, shrinking demand in shipping might also be felt regionally here. This in turn, might cause the region to loose its attractiveness as a shipping route. International insurance companies are currently steps that will reflect the political risks in the prices.
It might be better to focus on areas of possible instability in certain regions. Places that will constitute real problems for us are the Near East and Middle East countries. Our exports in the last ten years have increased from $3 billion to $20-25 billion according to data from Turkey’s statistical agency TUİK. This corresponds to five or six times higher figures compared with our exports volume to North Africa. If the problems stay contained in North Africa, only six percent of our exports will come under risk, while this would be 26 percent if the riots spread to the Near and Middle East.