Middle East and North Africa: Resilient Amid the Global Financial Storm by Masood Ahmed, Director, Middle East and Central Asia Department
November 30, 2009
A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in International Economic Bulletin, Carnegie Endowment for International Peace, November, 2009
The global financial and economic crisis has not left the Middle East and North Africa unscathed. However, the concerted countercyclical government spending of the region’s oil exporters has softened its blow. This high public spending, along with exceptional financial measures made possible by reserves amassed during the boom years, have cushioned the impact of the global slowdown not only on the oil exporters’ own economies, but also on those of their neighbors. Nevertheless, as elsewhere in the world, the crisis has revealed some vulnerabilities in the region’s financial markets.
Oil Exporters: Resilient to the Shock
The crisis has most directly impacted the region’s oil-exporting countries—Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—through a sharp drop in oil prices and, for some, a sudden drying up of capital inflows.
Between 2004 and 2008, amid high oil prices and strong investor interest, these countries grew by nearly 6 percent per year and accumulated $1.3 trillion in foreign assets.
With the collapse in oil prices—from a peak of $147 per barrel in mid-2008 to around $30 per barrel at the beginning of 2009—and subsequent cuts in oil production, however, the region’s oil exporters have seen their exports and fiscal revenues drop by an estimated 31 percent and 8 percent of GDP, respectively. Lower oil production will also result in a projected 3.5 percent drop in oil GDP in 2009—sharper than the drop in the global economy. The countries of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—have been hardest hit, with Saudi Arabia likely to register the most pronounced decline (15 percentage points) in oil GDP.
On the financial front, the crisis has also left its mark, although most banks in the region were not exposed to toxic assets. During the precrisis boom years, they profited substantially from loans for real estate and equity purchases. With the onset of the crisis, however, asset values collapsed, and global deleveraging led to severe credit tightening, particularly in the GCC. As a result, bank balance sheets have come under pressure and credit growth has slowed sharply, falling up to 40 percent, as in Qatar.
To help offset these shocks, most governments in the region—buttressed by strong international reserve positions—have maintained high levels of spending. In fact, Saudi Arabia’s fiscal stimulus package for 2009 – 10 is the largest as a share of GDP of all the G20 plans, and the country has also announced a five-year, $400 billion investment plan. To offset the liquidity crunch, governments have also directly injected capital into stressed financial institutions, and central banks have provided liquidity to stabilize financial systems.
These prompt and forceful policy actions have taken the sting out of the crisis containing its impact on the broader economy. Banking systems have so far absorbed the stress, and banks have remained solvent and profitable, though at a lower level. Deposit growth and capital inflows are beginning to regain strength (though private sector credit has remained sluggish, with banks opting to build up reserves in central banks instead). The non-oil sector is now projected to grow by 3.2 percent in 2009, with overall growth slowing to 1.4 percent from 4.6 percent in 2008. In addition, imports are being maintained at precrisis levels—holding strong at $700 billion in 2009—and are helping the global economy weather the downturn.
Continued spending comes at a cost, and maintaining countercyclical policies will become increasingly difficult if the crisis is prolonged. Current projections indicate that the oil exporters’ combined current account surplus will drop from more than $380 billion in 2008 to just over $50 billion in 2009. Some major oil exporters, like the GCC countries, Algeria, and Libya, have sufficient reserves to sustain spending over a longer period. Others—like Iraq, Iran, Sudan, and Yemen—have less fiscal space and will need to prioritize cuts in government spending and subsidies.
With the anticipated reemergence of global demand and higher oil prices, oil revenues will increase, allowing oil exporters to rebuild their international reserves by more than $100 billion in 2010, according to IMF projections. This, in turn, will provide the basis for maintaining public spending. The region’s contribution to global demand is also expected to remain solid, with the GCC’s share of world imports projected to increase from 2.7 percent in 2008 to 3.2 percent in 2009 and 2010. In 2010, both oil and non-oil GDP growth rates are projected to pick up to around 4 percent.
Oil Importers: Gradual Pickup
For the region’s oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—the economic slowdown has been less severe than in many other emerging markets, thanks to their lower degree of integration with global capital markets, the limited exposure of their banking system to structured financial products, their small manufacturing base, and positive spillovers from the region’s oil exporters. But, just as the downturn for these countries has been mild, the rebound will also be modest. While limited openness and lack of competition may have shielded them from the risks associated with the global economic downturn, their lack of international integration also implies foregone opportunities to boost economic growth and employment over the longer term.
The main consequence of the global economic contraction for these countries has been a reduction in receipts from abroad. Merchandise exports and foreign direct investment (FDI) have been hardest hit, and are projected to decline by 16 percent and 32, respectively, in 2009, though the region’s loss of export earnings has been much less than those experienced in Asia. Tourism receipts and remittances have also fallen in the oil importing countries, but by less than exports and FDI. Additionally, increased financial stress had given rise to capital outflows, but these are now reversing.
Much like the oil exporters, the oil importers have also responded through appropriate countercyclical policies, though they are more limited in scope. Growth for the oil importers is projected to fall from 5.0 percent in 2008 to 3.6 percent in 2009. In 2010, growth is projected to remain flat, mainly because of the slow recovery expected in their advanced economy trading partners and the limited scope they have for further countercyclical policies.
Lessons from the Crisis
Much as it did in the rest of the world, the crisis uncovered a number of vulnerabilities across the region. In some GCC countries, despite efforts to slow it down, rapid credit growth prior to the crisis fed asset price inflation, while overexposure to real estate and equity markets underscored the fact that risk was not only concentrated in the banking sector. The crisis also highlighted the importance of cross-border and cross-sector linkages as tight credit conditions drove some corporates and financial institutions to default.
Looking ahead, the crisis underscores the need for better coordination among countries and across regulating agencies in each country, enhanced regulations and supervision of nonbank financial institutions, and close monitoring of large conglomerates. Resolution frameworks for financial institutions and the corporate sector need also to be reviewed with a view to ensuring speedy, efficient processes. And, there may be value in developing alternatives to bank financing, such as local private debt markets. This would allow banks to concentrate more on financing small and medium-size enterprises that will help diversify economies and generate private sector jobs for the region’s rapidly growing population.
For most of the oil importers, high debt levels will limit the space for fiscal stimulus, and an anticipated increase in global interest rates from current historical lows will constrain the scope of monetary easing. More importantly, in today’s less benign global economic landscape, ensuring competitiveness will become an ever higher priority for these countries. Policy makers, therefore, need to focus on supply-side reforms to boost private sector activity and employment, which will, in turn, strengthen competitiveness. In countries without fixed exchange rate regimes, greater exchange rate flexibility will also facilitate these goals.