The global economic system has gone through a deep crisis with the Covid-19 lockdowns of 2020 and the beginning of 2021. The pandemic triggered multiple shocks in the MENA region that provoked structural development challenges. In 2020, the region's real GDP contracted by 3.8%. The rebound realized in 2021 is unlikely to be sufficient to return the region's economic activity to the 2019 level.
In December 2020, the global debt stood at $226 Trillion, amounting to 256% of the global GDP. In December 2021, global debt increased to $303 Trillion. According to IMF calculations, it is the highest hike in debt level the world has experienced since WWII. By all financial standards, the ratio poses a significant risk to global stability.
Consumer finance is one way to see the global crisis through; it is defined as "the borrowing, saving, and. investment choices that people (i.e., households) make over time". The most common types of consumer loans are – mortgages, auto loans, education loans, personal loans, refinance loans, and credit cards.
Many consumers in Global South countries expanded their borrowing to cope with similar contractions in government spending. MENA countries, struggling under different geopolitical, economic and security risks, are shifting towards a higher debt-exposed households consumption behaviour.
Global and Regional Debt Levels
External debt growth slowed in 2019 for the MENA region to a rate of less than 5%. It increased again in 2020 towards 8.5 to 9%. Net debt increases for the MENA region in 2020 were the smallest in the world at approximately $20 billion compared to all other regions. Increases were very significant in all other regions, with the most significant rises in debt inventory, in Latin America, with almost $80 billion, followed by East Asia, Europe and Africa.
Between mid-2021 and January 2022, all spreads on MENA credit increased at higher rates than the median global increase, except for Kuwait and Saudi Arabia. Some changes are significant, with Egypt's spread rising by 47%, and Turkey and Tunisia by more than 35%. The overall average of the relative value of MENA debt is high, making the region one of the worst default risks globally, second only to the Latin America region.
Many countries of the region are at or beyond their default risk threshold, which means they are in default probability territory, with Turkey and Tunisia both beyond their threshold levels and Egypt having crossed into high-risk levels at the beginning of 2022.
The indirect but significant effect of current account balances creates additional difficulties in servicing existing debt and hinders the ability to raise new external debt. Subsidies are one crucial reason for the deterioration of credit spreads for the region and the rise in debt costs.
The Nexus between Household Debt and Economic Growth
Household debt levels relative to GDP have risen rapidly in many countries over the past decade. A recent BIS study shows that an increase in the household debt-to-GDP ratio boosts consumption and GDP growth in the short run but tends to lower GDP growth in the long run.
Currently, US households are relatively well positioned. Household debt service as a percentage of disposable income remains near its lowest level on record. Its current 9.6% is nearly two percentage points lower than the average quarterly reading over the last 42 years. By comparison, just before the housing market crashed in 2007, more than 13% of US disposable income was earmarked for debt payments.
China's household debt continued to rise rapidly last year, despite the Covid-19 pandemic. As a share of GDP, it rose to 62% by end-2020, up from the end-2018 levels. Periods of rapid household debt growth can be followed by sharp market corrections, as South Korea, Taiwan, Thailand, and the US have experienced in previous cycles. The increase in household leverage has been driven primarily by mortgage lending, but unsecured consumer lending, such as credit cards, has also increased in recent years. Credit card balances are expected to grow to around 8.6% of GDP by end-2020, higher than in the US or South Korea.
Household Debt in the MENA Region
Data about consumer debt as a percentage of disposable income in MENA countries are not easily mined. However, the results of a survey in the region in 2020 about Arab youth showed that a larger share of Arab youth respondents had debt in 2020 at about 35% of respondents compared to 21% of respondents in the previous year.
According to an analysis conducted by "Independent Arabia", based on data from central banks in the Arab Gulf states, the total value of personal loans granted to individuals in the region amounted to $303.2 billion, with Saudi Arabia alone accounting for 30%, followed by the UAE at 29.3%, then Kuwait at 17.2%, and Qatar at 11.5%, Oman 8.5%, and Bahrain 3.6%.
According to the analysis, Bahrain recorded the highest percentage of individual loans out of the total credit provided by the banking system for all economic activities among the other Gulf countries, at 44%, followed by Kuwait at 43% and Oman at 40%, while it represented 23.7% in Saudi Arabia, and 21.6% in the UAE. Finally, Qatar is 13.5%.
During a lecture entitled "Risks of Borrowing", organized by the Abu Dhabi Judicial Department (ADJD), Dr Turki Al Qahtani, Senior Family Counsellor at the ADJD, addressed several points, including the effects of uncontrolled borrowing by individuals. Speaking about the specific nature of consumer loans, the lecturer warned: "These loans are intended primarily for consumption and not for production, and they exceed the individual's financial capacity, in addition to being linked to ephemeral social expenditures. This type of loan is motivated by the need to cover the difference between a low or limited income and increasing expenses". He then added that social stability depends on the ability to provide basic needs in terms of goods and services, as the economic dimension clearly affects the perception of security and psychological stability.
In Egypt, the volume of consumer financing (through the non-banking sector) amounted to about 16.4 billion EGP from January to July 2022, compared to 8.1 billion pounds during the same period of the last fiscal year. Electrical appliances and electronics topped the consumer financing activity in Egypt. The total exposure of these open positions should be adequately monitored under a higher controlled risk management scheme.
Turkey, which offered lucrative returns to foreign investors while lowering interest rates for domestic borrowers, was no exception. Buoyed by the high levels of global liquidity and easy money that characterized the early years of the current millennium, opening the gates of finance provided temporary financial stability and immense profit opportunities for different groups of capitalists.
With the ability of corporations to access new financial resources, Turkey's economy grew at a rate of 7.3% on average from 2003 to 2008. This growth was accompanied by an expansion in household debt levels driven by government policy choices that were themselves shaped by extended International Monetary Fund surveillance that discouraged state spending on public goods and services.
At the end of 2021, financial assets made up 58.6% of gross assets in Saudi Arabia and 63.4% in the UAE. Household debt in these countries has been low throughout this century.
The debt-to-asset ratio in 2021 in Saudi Arabia was 5.3%, slightly up from the 3.6% level in 2000. The ratio has risen more in the UAE, from 3.9% in 2000 to 8.9% in 2021, but debt is still low by international standards.
Saudi Arabia's household debt accounted for 12.1 % of the country's Nominal GDP in Sep 2022, compared with the ratio of 12.7 % in the previous quarter.
Debt Exposure Triggers in the Regional Context
On the Macro level, on the back of the lockdown repercussions, the war outbreak and monetary tightening, costly debt-interest payments will reduce the space for growth-enhancing public investments. Excessive debt could also increase macroeconomic risks, reduce creditworthiness, and affect the ability of economies to refinance (or rollover) maturing debt in the future. These risks, if they materialize, can result in such economic disorders as currency devaluations, runaway inflation, capital flight, and costly debt crises.
The conflict in Europe has created a global food supply shortage, as the two countries involved in the war are dominant exporters, causing a devastating impact on international prices. While this affects all countries, the effect on MENA is particularly severe, given the food dependency ratios of most of the countries in the region.
Most MENA countries have high levels of food dependency ratios. Their import dependency ranges between 40% for countries like Iran or Egypt, 100% for countries like Jordan, Lebanon and Kuwait, and with large countries like Algeria, Yemen and Saudi Arabia at very high ratios of between 65% and 80%. The import dependency of MENA countries is almost exclusively linked to both Ukraine and Russia, compounding the effect of the crisis. Shortages and price tensions carry a dominant weight in inflation at the consumer level. They influence about 30% of the CPI in GCC countries and 50% in all other MENA countries.
The combination of those elements has negatively affected MENA's external debt, as shown by financial flows. The region received the most minor amounts of new international flows in 2020, almost exclusively through international institutions like the IMF. Credit spreads show that the sustainability of external debt for the region is in question. Debt default in Lebanon is driving the country towards a failed state status through one of the most spectacular and deep financial crises in history, made worse by the combination of a currency devaluation, a foreign debt default and a real banking crisis. Tunisia is heading in the same direction.
All these trends weaken the region's debt suitability in general. MENA's debt levels could put the region at risk of significant turmoil of the magnitude of the 2011 Arab Spring unless the policies of debt management and fiscal balances change quickly towards investment rather than consumption to improve the creditworthiness of existing and future funding needs.
All these tensions put pressure on the consumer budget and push the boundaries towards more household debts directed mainly to sustain basic needs, such as food and housing expenses. The boom-bust cycle in house prices is observed in advanced economies and the Middle East, North Africa, and Central Asia region (MCD).
Increased credit spreads in the region reflect the tightening of liquidity. While the global context has led to deteriorating credit spreads, impacting all emerging and developing countries, MENA spreads declined faster than the overall average. This is an important signal of the region's particular external debt fragility.
MENA is in urgent need of more funding, not less. As its financial sustainability deteriorates, it needs more debt to invest in the crucially needed energy transition and economic diversification through aggressive reforms of existing subsidy and taxation systems.
Much like other countries of the Global South, fragility in the financial system and significant accumulated debt levels created economic turbulence, triggering capital outflows and resulting in dramatic crises.
Within a highly stressed global debt environment, avoiding the difficult choices required to confront these challenges is no longer possible. All MENA countries are being forced to switch from consumption-driven economies to production-oriented ones.
