UAE. One of the downsides of a globalised economy is that a crisis in one country would affect the entire world with effects varying across different regions.
The Middle East and North Africa (MENA) region would be affected in numerous ways if the Euro zone slips into recession again.
Firstly, recession in the European Union (EU) would result in reduced oil demand and thus, reduction in the oil prices. This would directly affect the oil exporting nations such as Saudi Arabia in the MENA. However, this would prove to be an advantage for oil importing countries like Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia in the same region (Oil expenses account for around 17% of the Gross Domestic Product in countries like Jordan).
Secondly, the Euro zone crisis would result in reduced overall consumption as European consumers tighten their belts in the wake of the financial crunch facing the economy. This would majorly impact the MENA countries that export products and services to the EU. For instance, Morocco, Libya and Tunisia’s trade with Europe accounts for over 50 per cent of their exports. At a lesser level, countries such as Egypt and Syria would also be hit where trade with Europe accounts for 20 per cent of their exports.
Thirdly, the European crisis has led to an increased international cost of borrowing with liquidity crunch and tightening of international credit conditions. This is due to the uncertainties surrounding the European Banks’ balance sheets. Further, this would adversely affect the MENA oil importing countries such as Morocco, Egypt and Libya where European Foreign Direct Investment (FDI) is a main component of the gross FDI.
According to Frost & Sullivan, an increased cost of borrowing accompanied with reduced demand will have an adverse effect on the project returns. Increase in the interest rates may lead to rejection of projects owing to decreased returns (IRR and NPV).
Lastly, the economic crisis in Europe may also adversely affect the tourism industry in the MENA region due to reduction in the European consumption patterns.
Note: Perspective by Sheetal Kothari, Research Analyst, Business and Financial Services Practice, Frost & Sullivan.
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