North Africa Business Forecast Report Q4 2008

North Africa: A Respite From Inflation?

Oil and inflation, the two major themes of our last North Africa Business Forecast Report, remain relevant this quarter, although the outlook has changed somewhat since our last report. Oil prices have tumbled since peaking at more than US$140/bbl in July, posing downside risks for our Algerian balance of payments forecasts. The country is still in an enviable position - the trade surplus grew by 51% in the first half of the year. However, Algeria's overwhelming dependence on hydrocarbons exports does leave it vulnerable to price fluctuations, and despite repeated talk of reform and diversification, moves to tighten up rules on investment could deter foreign companies from entering all but the most reliable of sectors.

Diversification is an issue in Libya, although the growing presence of Gulf institutions in the banking sector does bode well for growth there. Libya is growing from a low base and remains a relatively untapped market, which should ensure investor interest. Furthermore, the resolution of several international disputes would further enhance its international standing. Recent months have seen progress on two compensation issues: Libyan payments to victims of alleged Libyan-sponsored terrorist attacks, and Italian compensation for its 30-year period of colonial rule. Agreement on both issues is far from assured, but if successful, it would open up opportunities for investment from two of Libya's key trading partners.

In Morocco, economic growth is proving resilient despite tough global trading conditions. Rising inflation has squeezed household incomes in the first half of the year and expansion in household consumption is unlikely to match real GDP growth this year (which we are forecasting to come in at 5.5%). There are signs that inflation may have peaked, with food price inflation starting to ease and global oil prices falling. However, growth in Europe - Morocco's main trading partner - has become sluggish, posing downside risks to both the exports and the investment spending components of real GDP.

The same could be said of Tunisia, although strong growth in the service sector in particular led to real GDP growth of 5.7% year-on-year (y-o-y) in the first quarter of 2008. Investment from the Gulf continues to pour in, offsetting any downturn in European foreign direct investment (FDI) inflows. The challenge now is to convert economic growth into employment opportunities for Tunisia's growing army of university graduates. Despite the rapid expansion of higher education, unemployment has remained stubbornly in double figures. Coupled with a rise in inflation (which crept up again in July to 5.2% y-o-y after dipping slightly in June), this has stirred public unrest in usually peaceful Tunisia.