## Global Developments: Implications for the Middle East and Central Asia Region

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### Global growth outlook and transmission to MCD
- Average growth worldwide revised down to reach "3 percent" in 2019, and "3.4 percent" in 2020 versus projections one year ago of "3.7 percent" for both years.
- Reduction in global demand may be partly offset by recent loosening of global monetary policy, but concentration of the slowdown among key trading partners (especially Europe and China) has amplified the impact on the MCD region.
- Despite rising geopolitical tensions (including those related to Iran), recent disruptions to Saudi Arabia’s oil production, and ongoing conflicts (Libya, Yemen), global oil prices have remained low and financial conditions relatively loose.
- The MCD outlook is driven by a large contraction in Iran in the short term followed by a rebound in 2020; risks around the forecast are skewed to the downside and are highly dependent on global factors.

### Major downside risks and transmission channels
- Trade tensions
  - Ongoing trade tensions pose a substantial risk. The United States introduced additional tariffs on Chinese goods in September, with more scheduled for December.
  - Regional trade links to China are concentrated in MENAP oil exporters and Central Asia; indirect channels can amplify exposure beyond direct export shares.
  - Two measures of export elasticity to a reduction in Chinese demand are compared in the source: one assuming displaced competition is zero, and one assuming it is spread equally across all exporters to China — when competitive spillovers are considered, impact of a China-focused slowdown is more uniform across MCD countries.
- Oil price volatility
  - Oil price volatility has risen while remaining below the highs of 2018; overall level remains similar to that expected in the spring.
  - Recent Gulf events highlight sensitivity of the global oil market to disruptions in oil shipments and facilities.
- Brexit
  - A disorderly Brexit could significantly impact the region through lower external demand in countries with tight trade links to Europe (for example, Morocco and Tunisia).
  - Direct spillovers from a sharp contraction in the UK economy are likely to be more acute and unpredictable; financial channels are important because the UK is the largest banking counterparty for the MCD region, and several countries have considerable exposure to the pound sterling (Kuwait, Oman, Pakistan).
- Social tensions
  - Social tensions across the region remain elevated; protests earlier this year in Algeria and Sudan and more recently in Georgia and Kazakhstan highlight need for reforms to deliver higher and more inclusive growth.

### Regional growth projections (Real GDP Growth, 2018–24) — exact figures from source
- World: "3.6" (2018), "3.0" (2019), "3.4" (2020), "3.6" (2021–24)
- Euro area: "1.9" (2018), "1.2" (2019), "1.4" (2020), "1.4" (2021–24)
- United States: "2.9" (2018), "2.4" (2019), "2.1" (2020), "1.6" (2021–24)
- China: "6.6" (2018), "6.1" (2019), "5.8" (2020), "5.7" (2021–24)
- Russia: "2.3" (2018), "1.1" (2019), "1.9" (2020), "2.0" (2021–24)
- MENAP: "1.6" (2018), "0.5" (2019), "2.7" (2020), "3.1" (2021–24)
- MENAP oil exporters: "0.2" (2018), "–1.3" (2019), "2.1" (2020), "2.1" (2021–24)
  - of which: non-oil GDP growth: "0.4" (2018), "1.1" (2019), "2.6" (2020), "2.5" (2021–24)
- MENAP oil importers: "4.3" (2018), "3.6" (2019), "3.7" (2020), "4.8" (2021–24)
- CCA: "4.2" (2018), "4.4" (2019), "4.4" (2020), "4.5" (2021–24)
- CCA oil and gas exporters: "4.1" (2018), "4.3" (2019), "4.4" (2020), "4.5" (2021–24)
  - of which: non-oil GDP growth: "3.0" (2018), "5.1" (2019), "4.6" (2020), "4.2" (2021–24)
- CCA oil and gas importers: "5.2" (2018), "4.9" (2019), "4.5" (2020), "4.5" (2021–24)

### Box 1 — Decoupling of regional geopolitical tensions and oil prices: findings and regression evidence
- Historical episodes: oil prices rose nearly "60 percent" from "$22 a barrel" in November 2002 to "$35 a barrel" in March (lead-up to 2003 Iraq war); by contrast, oil prices rose only "8 percent" from "$71" in August to "$77" in October following reimposition of US sanctions on Iran.
- Role of US shale:
  - US shale oil production increased from slightly less than "7 percent" of the total US crude oil production in the early 2000s to more than "60 percent" in 2018.
  - Increased shale production has contributed to historically high US crude oil inventory since 2015, exerting downward pressure on oil prices.
- Regression results (selected coefficients; sample January 1999 to June 2019):
  - Δ Real oil price — Δ Political risk in MENAP: "0.96**" (standard error "(0.59)")
  - Δ Political risk in MENAP * Shale dummy: "–0.87*" ("(0.63)")
  - Δ VIX: "–0.12***" ("(0.03)")
  - Δ US crude inventory: "–0.31***" ("(0.16)")
- Interpretation:
  - There is a positive and significant relationship between political risks in MENAP and real oil prices, but this effect is dampened by the rise of shale oil since 2010.
  - Trade uncertainty (captured by spikes in the Chicago Board Options Exchange Volatility Index, VIX) is associated with negative impacts on oil prices.

### Box 2 — Monitoring social unrest: findings and implications
- Reported Social Unrest Index (RSUI) shows reported social unrest has risen to highs not seen since 2014.
- Unrest earlier in the year concentrated in Algeria and Sudan; more recently protests have flared in Georgia and Kazakhstan.
- Social unrest constrains policy options (example: Tunisia postponed urgent public sector wage-bill reforms due to fear of protests; major demonstrations last year led to policy changes in Armenia and Jordan).
- Policymakers face persistent structural shortcomings limiting jobs and opportunities; failure to deliver higher and more inclusive growth may risk further instability.

### Policy priorities and recommendations (near term and medium term)
- Near term: stabilize macroeconomic conditions and build resilience by addressing unsustainable fiscal policies while protecting the most vulnerable.
- Medium term: promote inclusion and raise growth by tackling impediments to jobs and investment.
- Specific policy challenges identified:
  - Fiscal policy institutions and conduct: adopt policies to promote fiscal transparency and predictability, such as credible medium-term fiscal frameworks.
  - Capital flows and investment: address the shift in composition of capital flows (FDI replaced by portfolio flows, especially in MENAP); promote deeper markets, reduce restrictions on investment, and improve macroeconomic stability to attract FDI.
  - Structural reforms: implement reforms to boost growth and employment; failure to do so risks exacerbating social tensions and undermining regional stability.
- Conditional policy stance: More accommodative policies should be considered if there is further slowdown in countries where growth is already too low and when there is policy space.

*International Monetary Fund | October 2019*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/global-development.pdf_