Opinion: Spending sees Gulf through crisis, A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

May 27, 2009

A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in Financial Times, May 13 2009

Oil prices have dropped from $147 a barrel to between $50 and $60 over the past year, leading to a collapse of export revenues for Middle Eastern and North African oil producers.

Foreign investment, remittances, and tourism receipts will be affected throughout the region. Yet growth—although slowing—remains higher than in many regions, including Latin America and eastern Europe. This year, the oil exporters of the Middle East and North Africa will see their non-oil gross domestic product—a good measure of local economic conditions that directly affect their population—expand at more than 3.5 per cent. Real GDP in the region’s diverse group of oil-importing emerging markets and developing countries should also grow at about the same rate.

To be sure, this represents a slowdown from the near 6 per cent growth rates of recent years, but in terms of the magnitude of the slowdown, as well as the level of growth, the Middle East and North Africa is slated to be the best performing region after developing Asia this year. What explains this resilience?

Part of the explanation is that banks in the region had little exposure to the toxic assets that have created turmoil elsewhere. Also, countries in the region have not been affected to the same extent by the sharp declines in export volumes, as in Asia, or the withdrawal of capital flows, as in the case of Latin America and eastern Europe.

Another dimension of the answer lies in timely and decisive policy actions. With the sharp decline in global interest rates, central banks have responded by easing monetary policy. In some Gulf Co-operation Council countries where banks experienced financial distress, the authorities have quickly provided liquidity and capital.

But the most important factor behind the resilience of the Middle East and North Africa is that the region’s oil exporters have decided to maintain high levels of capital spending by drawing upon reserves accumulated during the boom years.

Between 2004 and 2008, the region’s oil-exporting countries grew by about 6 per cent a year and accumulated $1,300bn in foreign assets. Now these reserves provide the basis for counter-cyclical fiscal spending during the downturn. Saudi Arabia has announced the largest fiscal stimulus package (as a share of GDP) among the G20 countries for 2009-10, and a $400bn investment plan over five years.

Continued high public spending not only cushions oil exporters’ economies. It also contributes to sustaining global demand and provides positive spillovers to neighbouring oil importers whose economies are interlinked. Despite some redundancies in construction and related industries, most of the estimated 14m expatriate workers in the six oil exporters comprising the GCC continue to send about $40bn a year in remittances to their home countries.

The flip side of continued public spending is that the combined external current account of the region’s oil exporters will likely swing from a massive surplus of $400bn in 2008 to a small deficit this year.

Some leading oil exporters, such as Saudi Arabia, other GCC countries, Algeria and Libya, have sufficient reserves to sustain such spending over a prolonged crisis. Others, such as Iraq, Iran, Sudan and Yemen have more limited fiscal space and are having to prioritise or cut state spending and subsidies.

Middle East and North African oil-importing countries are facing weaker prospects for exports and foreign direct investment. Tourism and remittances have also come under strain, although the data so far show them to be quite resilient.

An important uncertainty is whether this resilience will remain if the recession in Europe is prolonged, which will be particularly important for North Africa.

The rapidly changing international economic landscape has put a premium on proactive policymaking. Fortunately, most of the region’s governments are adapting their fiscal and monetary stance and a few have also been able to draw upon the International Monetary Fund and donors to supplement their limited financing capacity.

But the best outcome for all countries in the region would be a speedy return to positive growth and well-functioning financial markets in the world as a whole.

The writer is director of the IMF’s Middle East and Central Asia Department

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