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Governments in the Middle East are becoming more receptive to growing private sector involvement in their economies because public sector debt in many markets is ballooning, an official from the World Bank's International Finance Corporation (IFC) has said.
Speaking on an investors' panel debate at the Global Financial Forum in Dubai on Monday, the IFC's Middle East and North Africa (MENA) director, Mouayed Makhlouf, said: "For the first time, because of the massive rise in public debt across the region, we see a difference. Our narrative with these governments has changed. Now, they are coming to us and they are saying 'can you help us with the reforms?'"
Makhlouf said that the MENA region needs to create 300 million new jobs - "basically, double the population" by 2050 due to the burgeoning youth population in the region, and that Egypt alone needs to create around 700,000 jobs per year, although he said it is MENA's fastest growing economy currently, with GDP growth of 5.3 percent, compared with a regional average of around 2-3 percent.
"The social contract in MENA is as such where most of the services (are) provided by the public sector. But what you have ended up with... is a huge public debt that has been rising for the past few years," he said, adding that debt-to-GDP ratios stand at around 96 percent in Egypt, 97-98 percent in Jordan and 150 percent in Lebanon.
"For us, the main thing we need to find in this region are... growth and jobs. And I really believe both of these things can only come through a larger private sector participation," Makhlouf said.
In a separate panel on the outlook for the region's banking sector, JP Morgan's Asif Raza said that the decline in oil prices that began in 2014 had created opportunities for international banks to advise governments that are looking to diversify on how to embark on "monetisation and privatisation" of assets.
Naveed Kamal, MENA head of corporate banking at Citi, said that governments had run up deficits as oil revenues fell, and had financed these through "various instruments where banks have been involved".
"And we expect to see that continue over the next 2-3 years."
Although total GCC fixed income issuance declined by 16 percent year-on-year to $145.3 billion in 2018 as oil prices rallied, according to Kamco Research, JP Morgan's Raza said the current pipeline is “huge”.
A faster flow
Raza said that at this stage last year, "over $15.4 billion worth of issuance was done in the MENA region – this year, it's $28 billion".
He added that in 2018, “the loan market was (at an) all-time high in this region”. Figures published earlier this month from Acuris showed that syndicated loan activity in the MENA region last year outstripped bond issuance - with $133 billion of syndicated loans issued, compared to $89.5 billion in bonds.
Raza said that at the top end of the corporate banking market, “there's lots of activity still happening”.
"There's still quite a decent pipeline of financing and refinancing," he said.
However, Citi's Kamal argued that the market has been much tougher for SMEs in recent years.
"I believe that there is room for improvement for all countries in the region as far as creating the right balance for SMEs (is concerned)," he said.
He said that "time and again" in tougher economic times large corporates, government-related entities and even government departments have delayed payments to SMEs, which causes cashflow problems and affects their ability to repay creditors.
Quick exits
"And some of the legal framework that surrounds the corporate sector - we all know about bounced cheques and the consequences of that. In summary, what happens is SMEs can't stay back in a number of cases (to) fight through these cycles. So we see skips, people leave and that does not leave a very strong impact as far as consumer confidence is concerned."
Yet funding shortages for private sector firms can also create opportunities - not least for the region's private equity sector, according to Karim El-Solh.
Speaking on the investment panel, El-Solh said that his firm's pipeline "has increased dramatically as a result of a lack of availability of funding for businesses elsewhere.
"The IPO market is not open, the bank liquidity has dried up so for us it's an opportunity to come and be a provider of growth capital. We are seeing more companies, better quality companies, we're acquiring controlling stakes at lower valuations," he said.
Makhlouf said more opportunities need to be created for the private sector, stating that levels of private sector involvement in the economy in the region lag behind other emerging markets.
"MENA region is only one-fifth in terms of private sector participation compared to Latin America," he said.
(Reporting by Michael Fahy; Editing by Mily Chakrabarty)
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