Uncovering Medium-Term Credit Cycles in MENA Region: Insights and Implications

The research delves into the existence and implications of medium-term credit cycles in MENA countries, shedding light on their relevance to GDP, private-sector credit drivers, and synchronization across nations. Comparisons with advanced economies reveal fundamental distinctions, prompting further exploration and policy considerations, especially in light of limited prior work in the region.

• Credit cycles
• MENA region
• Private-sector credit
• Medium-term analysis
• Economic policy

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1. C CREDIT REDIT C CYCLES YCLES I IN N C COUNTRIES OUNTRIES IN IN MENA R T THEY HEY M MATTER MENA REGION ATTER? ? EGION D DO O T THEY HEY E EXIST XIST? D ? DO O LEILA AGHABARARI AHMED ROSTOM The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 1

2. USA: Real Credit (in percent) Egypt: Real Credit (in percent) Saudi Arabia: Real Credit (in percent) 15 60 100 10 40 50 5 20 0 0 0 -5 -20 -50 -10 1967 1977 1987 1997 2007 2017 1967 1977 1987 year 1997 2007 2017 1967 1977 1987 1997 2007 2017 year year Medium-term cycle Real credit growth (y/y) Medium-term cycle Real credit growth (y/y) Medium-term cycle Real credit growth (y/y) The Private The Private- -Sector Credit Cycle in MENA vs USA Sector Credit Cycle in MENA vs USA

3. Medium-term credit cycles in MENA may exist, but they: - have little relevance for GDP - do not drive overall private-sector credit - are not synchronized across countries Fundamentally different from advanced countries Findings and Findings and Further Steps Further Steps 3

4. Growing research topic Aikman et al. (2014, EJ) Schularick and Taylor (2012, AER) Motivation Motivation Moving into policymakers center of attention BIS 2014 Annual Report Not much work done in MENA region 4

5. Real credit to the private sector by domestic deposit-taking institutions Real Credit Growth: Private-Sector Credit/GDP * Real GDP Data Data Source: WDI from 1964 2017 Oil exporters: Saudi Arabia, Bahrain, Algeria, Iran, Kuwait, Oman, UAE, Qatar. Oil importers: Egypt, Jordan, Lebanon, Morocco, Tunisia, Syria, Libya, Yemen. Advanced: Norway, Spain, Netherlands, Japan, UK, USA 5

6. Spectral analysis: ChristianoFitzgerald (2003) filter to extract medium-term cyclical component BIS: 8-20 year component 6-15 year component due to data constraints Methodology Methodology 6

7. Saudi Arabia: Spactral Density Function of Real Credit Egypt: Spactral Density Function of Real Credit 6.00 6.00 6 6 Periodogram Periodogram of the Real of the Real Credit Credit Growth Growth 4.00 4.00 4 4 2.00 2.00 log Periodogram log Periodogram 2 2 0.00 0.00 0 0 -2.00 -2.00 -2 -2 -4.00 -4.00 -4 -4 -6.00 -6.00 -6 -6 0.00 0.10 0.20 0.30 0.40 0.50 0.00 0.10 0.20 0.30 0.40 0.50 Frequency Frequency Evaluated at the natural frequencies Evaluated at the natural frequencies 7

8. Periodogram of Periodogram of the Real Credit the Real Credit Growth Growth USA: Spactral Density Function of Real Credit 6.00 6 4.00 4 2.00 log Periodogram 2 0.00 0 -2.00 -2 -4.00 -4 -6.00 -6 0.00 0.10 0.20 0.30 0.40 0.50 Frequency Evaluated at the natural frequencies 8

9. Check 1 Check 1 Recessions in MENA? Recessions in MENA? Medium Medium- -term Cycle Peaks Associated With term Cycle Peaks Associated With 1 2 3 4 5 6 7 8 9 v 1 2 3 4 5 6 7 8 VARIABLES GDP Growth VARIABLES GDP Growth Jordon -0.54 Saudi Arabia -3.7 (-2.15) (3.41) Morocco 0.17 Bahrain 0.67 (1.05) (1.55) Egypt, Arab Rep. 2.56*** Algeria -1.6 (0.66) (2.44) Lebanon -2.8 (5.1) Iran, Islamic Rep. -5.8** Tunisia -0.8 (-2.4) (0.95) Kuwait 0.64 West Bank Gaza 2.3 (0.21) 3.6 Oman -3.1 Yemen, Rep. 1.7 (4.6) 2.5 United Arab -1.31 Syrian Arab Rep. 2.1 Emirates 1.9 (2.7) Libya 6.2 Qatar 2.6 17.8 (5.8) Observations 49 57 57 57 52 52 52 17 Observations 42 51 57 29 23 23 27 57 18 R-squared 0.027 0.221 0.416 0.207 0.272 0.304 0.073 0.04 R-squared 0.166 0.008 0.319 0.022 0.002 0.083 0.059 0.019 0.17 9

10. 1 2 3 4 5 6 VARIABLES GDP Growth USA -1.05** 0.55 Norway -0.89** 0.47 Check 1 Check 1 term Cycle Peaks term Cycle Peaks Associated With Associated With Recessions in Recessions in advanced countries? advanced countries? Medium Medium- - Netherlands -1.3** 0.59 Japan -3.7*** 0.93 -1.04** Uk 0.53 Spain -1.88** 0.77 Observations 57 57 57 57 57 57 R-squared 0.109 0.07 0.17 0.429 0.353 0.114 10

11. USA: Medium-term Credit Cycle and GDP Growth (in percent) Egypt: Medium-term Credit Cycle and GDP Growth (in percent) Saudi Arabia: Mediuterm Credit Cycle and GDP growth (in percent) 10 20 60 10 40 5 20 0 0 -10 0 -5 -20 -20 1967 1977 1987 1997 2007 2017 1967 1977 1987 1997 2007 2017 1967 1977 1987 1997 2007 2017 year year year Medium-term credit cycle GDP Growth Medium-term credit cycle GDP Growth Medium-term credit cycle GDP Growth Check 1 Check 1 Medium Medium- -term Cycle Peaks Associated With term Cycle Peaks Associated With Recessions in MENA? Recessions in MENA? 11

12. Saudi Arabia: Credit Cycles and GDP Correlogram Egypt: Credit Cycles and GDP Correlogram USA: Credit Cycles and GDP Correlogram 1.00 1.00 1.00 1.00 1.00 1.00 corr-growth of real credit cycle and growth of GDP corr-growth of real credit cycle and growth of GDP corr-growth of real credit cycle and growth of GDP 0.50 0.50 0.50 0.50 0.50 0.50 0.00 0.00 0.00 0.00 0.00 0.00 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -1.00 -1.00 -1.00 -1.00 -1.00 -1.00 -10 -5 0 5 10 -10 -5 0 5 10 -10 -5 0 5 10 Lag Lag Lag Check 1 Check 1 Medium Medium- -term Cycle Peaks Associated With term Cycle Peaks Associated With Recessions in MENA? Recessions in MENA? 12

13. USA: Medium and Short-term Real Credit Cycle (in percent) Egypt: Medium and Short-term Real Credit Cycle (in percent) Saudi Arabia: Medium and Short-term Real Credit Cycle (in percent) 20 20 5 10 10 0 0 0 -10 -10 -5 -20 -20 1967 1977 1987 1997 2007 2017 1967 1977 1987 1997 2007 2017 1967 1977 1987 1997 2007 2017 year year year Medium-term credit cycle Short-term credit cycle Medium-term credit cycle Short-term credit cycle Medium-term credit cycle Short-term credit cycle Check 2 Check 2 Medium Medium- -term Cycle Accounts for Most of the Fluctuations in term Cycle Accounts for Most of the Fluctuations in Real Credit? Real Credit? 13

14. Country Volatility Ratio MENA Countries Saudi Arabia 0.5 Jordon 0.6 Bahrain 1.2 Algeria 0.6 Iran, Islamic Rep. 0.9 Kuwait 0.9 Morocco 0.9 Qatar 0.6 Egypt, Arab Rep. 0.9 Lebanon 0.8 Oman 1.3 Tunisia 0.85 Yemen, Rep. 0.9 United Arab Emirate 1.1 Syrian Arab Republic 1 Libya 0.9 Non-MENA Countries Norway 1.1 Spain 1.8 Netherlands 1.2 Japan 1.4 United Kingdom 1.3 United States 1.8 Check 2 Check 2 Medium Medium- -term Cycle Accounts for Most of the Fluctuations in term Cycle Accounts for Most of the Fluctuations in Real Credit? Real Credit? 14

15. Medium-term Credit Cycle in Advanced Countries (in percent) Medium-term Credit Cycle in Oil Importers (in percent) Medium-term Credit Cycle in Oil Exporters (in percent) 20 40 20 20 10 10 0 0 0 -20 -10 -20 -10 -40 1967 1977 1987 1997 2007 2017 year 1967 1977 1987 1997 2007 2017 -20 year Jordan Egypt Tunisia Yemen Libya Morocco Lebanon West Bank and Gaza Syria 1967 1977 1987 1997 2007 2017 Saudi Arabia Iran Qatar UAE Kuwait Algeria Bahrain Oman year USA Netherlands Spain Norway Japan UK Average correlation: 0.08 Average correlation: 0.21 Check 3 Check 3 Medium Medium- -term Cycle Synchronized Across Countries? term Cycle Synchronized Across Countries? 15

16. 16 Our Next Two Our Next Two Working Papers Working Papers

17. 17 C CREDIT REDIT C CYCLES YCLES I IN N C COUNTRIES OUNTRIESIN IN S SUB UB- -S SAHARAN AHARAN A AFRICA FRICA LEILA AGHABARARI AHMED ROSTOM

18. Medium-term credit cycles in SSA: Credit Cycles in most SSA countries are similar to those of advanced countries Credit Cycles seem to have relevance for GDP Growth Initial Initial Findings Findings 18

19. USA: Real Credit (in percent) 15 The Private The Private- -Sector Credit Cycle Credit Cycle Sector 10 5 0 -5 -10 1967 1977 1987 year 1997 2007 2017 Medium-term cycle Real credit growth (y/y) Botswana: Real Credit (in percent) Nigeria: Real Credit (in percent) 19 100 60 40 50 20 0 0 -20 -50 1970 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020 year year Medium-term cycle Real credit growth (y/y) Medium-term cycle Real credit growth (y/y)

20. 20 C CREDIT REDIT C CYCLES YCLES I IN N C COUNTRIES OUNTRIESIN IN S SOUTH OUTH A ASIA R REGION EGION SIA LEILA AGHABARARI AHMED ROSTOM

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