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North Africa and Levant: calmer waters but external risks remain elevated


  • Economically, many of the countries in the region are relatively stable, but current account deficits are widening
  • External fundamentals have worsened in the past year as terrorism and conflict impact countries’ tourism and FDI inflows, particularly so for Tunisia and Egypt
  • External risks are partly mitigated by high remittance flows (Egypt, Jordan and Lebanon) and support from the Gulf Cooperation Council and the IMF
  • Most countries in the region additionally have very high import covers (Egypt and Tunisia excepted), contributing to their external resilience

Most of the countries in North Africa and the Levant are in relatively steady economic waters despite all the threats that loom around them and beyond the horizon. Growth is quite stable in Morocco, Algeria, Jordan and Egypt (figure 1). Even Iraq should grow at a steady 4% in 2016. Only Lebanon and Tunisia post considerably lower growth rates than in the past couple of years. Unemployment is high but declining in all countries except Algeria and Egypt (figure 2). Inflation is also relatively low and more importantly, looks very steady in most countries. With a decline in oil prices, Jordan and Lebanon have seen actual deflation in 2015, but this is expected to give way to modest inflation in 2016 for Jordan and 2017 for Lebanon.

Figure 1: Low but steady growth
Figure 1: Low but steady growthSource: IMF WEO
Figure 2: Unemployment remains high
Figure 2: Unemployment remains highSource: IMF WEO, World Bank

The main weakness for many countries lies in the external accounts. Although Lebanon and Algeria stand out with very large current account deficits of over 17% of GDP, most countries’ deficits exceed 5/6% of GDP. Morocco is a notable exception. These deficits have become a structural weakness and are in part a legacy of the Arab Spring of 2011. This uprising sparked domestic instability and left room for insurgency and in some countries civil war. The worsening of the security situation in these countries has affected negatively their economies through trade, tourism and investment. Below we look at where countries stand in terms of security and terrorism and how this impacted their external fundamentals.

Figure 3: More steady inflation rates
Figure 3: More steady inflation ratesSource: IMF WEO
Figure 4: Current account deficits increasing
Figure 4: Current account deficits increasingSource: IMF WEO

Terrorism and conflict hurts external fundamentals

The power vacuum that the Arab Spring left in many countries, has in some cases been filled by militant (Islamist) groups. Although the most obvious case is the rise of the Islamic State in Syria, Iraq and Libya, also in other countries there has been marked rise in (civilian) casualties from terrorism. Despite retaining a functioning state, Egypt, Lebanon and Tunisia have seen their casualties rise significantly (figure 5). Tunisia looks comparatively safe in the graph below but it saw two large terrorist attacks in 2015. Also Egypt has seen terrorist incidents in 2015, the most notable was the downing in November of a Russian airplane (224 casualties), which flew over the Sinai desert, an area that the Egyptian army is struggling to take control of. A few days later, Beirut saw two bombings that killed between 37 and 43 persons.

Figure 5: Death from terrorist attacks
Figure 5: Death from terrorist attacksSource: Global terrorism database
Figure 6: Tourism on a downward trend
Figure 6: Tourism on a downward trendSource: World Bank, Rabobank

This worsened security situation has repercussions for their economies and for tourism, a big foreign exchange earner for many North African and Levant countries. Despite the attacks happening in June, Tunisia has seen a 25% drop in tourist arrivals in 2015, while the country had already suffered significantly since the start of the Arab Spring (figure 6). The 3 month average of tourist arrivals in Egypt was 42% down by January 2016. Tourism had already been on a steadily downward path in Lebanon but this trend accelerated after the Arab spring and is likely to persist. So far, the spillover to countries like Jordan have been modest. Possibly some tourists are substituting more dangerous Egypt or Lebanon for safer Jordan. Neighbouring territories currently held by the Islamic State, the likes of Lebanon, Jordan and Tunisia remain vulnerable to terrorist attacks.

The security situation can also have broader implications for the investment climate in a country. We see that FDI into a country like Morocco has quickly rebounded, when it became clear that the Arab Spring had limited political impact (table 1). Tunisia was more affected, whilst countries like Lebanon, Jordan and Egypt have seen FDI plummet. A combination of lower FDI and lower tourism inflows is concerning as current accounts deficits in the region keep widening.

Table 1: Gross FDI inflows into respective countries (% of GDP)
Table 1: Gross FDI inflows into respective countries (% of GDP)Source: World Bank

Mitigating factors: Remittances, reserves and support

Amidst a more challenging external environment, remittances can boost external resilience as they support the foreign currency position of a country. We see that a number of countries in the region have a steady inflow of remittances. Lebanon, which has relatively by far the largest diaspora, received remittances worth 16% of GDP. Jordan, Morocco and Egypt also received sizeable remittances. To see how remittances can cover critical imports, figure 7 shows the remittances as percentage of imports. Since 2011, Egypt is doing best, with remittances covering just under 30% of imports, as remittances into the country quadrupled between 2005 and 2014. We see that also Lebanon, Jordan and Morocco have sizeable remittance inflows relative to imports. Tunisia lags in this respect as remittances cover just 9% of imports.

Figure 7: Remittances cover imports
Figure 7: Remittances cover importsSource: World Bank, Rabobank
Figure 8: Import cover largely suffices
Figure 8: Import cover largely sufficesSource: EIU

Countries in the region have also been helped by support from their richer GCC neighbours. That support is under pressure, as these countries have their own problems to deal with (see this Special). That said, recent investment deals signed between Saudi Arabia and Egypt, demonstrate that many GCC countries are still committed to strategically supporting their neighbours, most notably Egypt. Relations between the GCC and Lebanon appear more restrained, as the Shia factions in that country are increasing their political leverage, at the expense of Sunni parties. This has prompted Saudi Arabia to cancel some military aid to Lebanon and send some Lebanese migrant workers in Saudi Arabia packing. Instead of looking to the GCC, some countries have turned to IMF for support. Tunisia and Jordan have just concluded a new agreement with the IMF over support while there are signals that Egypt is contemplating a similar move.

Despite the weaker external fundamentals, we see that many countries have managed to retain a high import cover. Only Egypt and Tunisia are forecast to have a low import cover of just 2.8 and 3.9 months in 2016 (figure 9). Jordan and Lebanon have a comfortable and high import cover, respectively. Though in the case of Lebanon, this is also necessary to accommodate outflows of its large banking sector in case of a sudden shift in risk perception. 

The interaction between banks and sovereigns

Though banking sectors in North Africa and the Levant are very homogenous. We see some overall parallels between countries. Firstly, in most countries, banks have an intimate relationship with the state. In Egypt, Lebanon and Jordan, they are large off-takers of state paper, with Lebanon covering half of the sovereign’s financing needs. This makes the respective banking sectors vulnerable to sovereign defaults. Egypt, Tunisia and Algeria have a large state presence in the banking sector. In Algeria the state used some of the oil funds to cover liquidity shortages in the banking sector; as a result, credit metrics actually improved despite a difficult 2015. In Tunisia the state was forced to shore up capital ratios in some of the largest (state) banks, highlighting the risk of a weak banking sector to the sovereign. The Tunisian banking sector has been adversely affected, particularly by the decline in tourism, a sector to which it has a lot of exposure. The expected further decline of tourism in 2016will further weigh on the state of the Tunisian banking sector. Morocco on the contrary, has the best supervised and well capitalized banking sector. The Moroccan 2014 banking law strengthened the central bank’s independence, supervision and resolution powers as Morocco’s three largest banks are expanding abroad.

Security outlook for the region

The gradual implosion of ISIS can still have repercussions in neighbours

In 2015, the international anti-ISIS coalition ramped up their air strikes on ISIS, while the Iraqi army also stepped up its offensive against the Islamic State. As a result, the Islamic State has lost territory north of Baghdad and on the 31st of March, Iraqi forces recaptured Tikrit from ISIS. Currently, the Iraqi army is close to recapturing Fallujah, some 60 kilometer from Baghdad. Though advance against ISIS is expected to slow, we take the rise in terrorist attacks on the part of ISIS as a signal that they are increasingly cornered. Financially, the group is also increasingly squeezed. ISIS relied on oil for 40% of its revenue, which it sells to smugglers at a huge discount who then take it across the border to Turkey. A lack of skilled staff and attacks on some oil facilities have hurt production and the UK government estimates that ISIS oil revenue is down 50%.

According to a detailed study by the Soufan group, 2015 saw a significant uptick in the number of new fighters. New recruits from Europe grew from around 2,000 to 5,000, while new fighters from the Middle east and North Africa doubled from 8,000 to 16,000 while there was also a significant increase to 4,700 new fighters from CIS countries. However, fighters are also being killed at a significant rate: So far 25,000 ISIS-fighters have been killed and on top of that the Iraqi army is pressing ahead. As resources and fighters dwindle, the likely outcome is a gradual implosion of ISIS. The terrorist group will become more dangerous as it will grow more aggressive with each defeat. Porous borders and significant numbers of fighters and resources mean that surrounding countries but also home countries of fighters and countries with large groups of refugees, in which terrorist are disguised, are at risk, both in the Middle East as well as in Europe.

Ending the civil wars in Syria, Libya and Yemen

On the 27th of February 2016 a ceasefire between the rebels and Assad’s regime took effect. After Russia forced a breakthrough for Assad by providing air support, the ceasefire looked like the first attempt towards establishing peace. However this will be a difficult process as Assad and the rebel groups have diametrically opposed interests. The rebels will want as great a degree of decentralization while Assad will want as little power sharing as possible. Finding a compromise will be difficult. Russia is likely to want a deal as soon as possible as both US presidential candidates have indicated to favor a more interventionist stance than current president Obama.

Libya has edged a step closer to peace with the formation of a unity government in December 2015. After a slow start, the unity government has managed to win over the Tripoli militias and will gain exclusive control over Libya’s state oil company NOC and the central bank. When the rivalling elected government succumbs to the unity government, this will unblock oil terminals in the east of the country which could push up oil exports to 400,000-500,000 bpd from 200,000 bpd currently which should help the government further consolidate its power.

In Yemen, parties are negotiating a peace treaty but constant breaches of the ceasefire make it difficult to bring the talks forward. Saudi Arabia, which is committed to helping the Yemeni government, has an incentive to help end the conflict as it has proven to be a costly affair, especially in the current low oil price environment.


National Consortium for the Study of Terrorism and Responses to Terrorism (START). (2013). Global Terrorism Database [Data file]. Retrieved from http://www.start.umd.edu/gtd

The Soufan Group. (2015). FOREIGN FIGHTERS: An Updated Assessment of the Flow of Foreign Fighters into Syria and Iraq

Jurriaan Kalf
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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