Regional Economic Outlook: Middle East and Central Asia Update
Middle East and Central Asia, April 30, 2017
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Bibliographic details
- Authors: country authorities.
- Published: April 30, 2017
- Series: Middle East and Central Asia
Overview and key global assumptions
- Global growth projected to reach 3.5 percent in 2017 and 3.6 percent in 2018, up from 3.1 percent in 2016.
- Baseline oil price assumptions: US$55.23 a barrel in 2017 and US$55.06 a barrel in 2018.
- Six-month LIBOR on U.S.-dollar deposits assumed to average 1.7 percent in 2017 and 2.8 percent in 2018.
- Risks to the global outlook skewed to the downside, including potential protectionism and faster-than-expected U.S. monetary policy normalization.
- The OPEC+ agreement helped raise near-term oil prices but prices remain volatile; key uncertainties include compliance, production by exempt/nonparticipating countries, and downside risks to global growth.
Regional growth and outlook
- Overall assessment: A more favorable global environment is helping improve prospects in MENAP and CCA, but growth remains subdued and structural reforms are needed.
- CCA:
- Growth was 2.4 percent in 2016 (1 percentage point higher than projected in October 2016, yet 0.8 percentage point lower than in 2015).
- Projected to pick up to 3.1 percent in 2017 and accelerate to 4.1 percent in 2018.
- Projected average growth of 4.3 percent in 2018–22, compared with 8.1 percent in 2000–14.
- CCA oil exporters:
- Growth slowed to 2.2 percent in 2016, 0.9 percentage point lower than in 2015 (lowest since 1998 for the oil-exporter group).
- Projected rebound to 3.1 percent in 2017 and 4.1 percent in 2018.
- Country-specific drivers: Kazakhstan—higher Kashagan output and fiscal stimulus; Azerbaijan—lower oil production and financial vulnerabilities; Turkmenistan and Uzbekistan—steady growth but external deficit concerns for Turkmenistan.
- CCA oil importers:
- Growth was 3.3 percent in 2016 (lowest since the global financial crisis).
- Projected to accelerate to 3.6 percent in 2017 and 3.9 percent in 2018, with continued improvement over the medium term.
Fiscal positions and consolidation
- General trend: Overall fiscal balances deteriorated in 2016 in most countries as policymakers used fiscal policy to offset external shocks; public debt increased and fiscal space declined.
- Fiscal consolidation expected to occur mainly through reduced public investment; emphasis on protecting critical social expenditure and improving efficiency of public spending.
- Oil exporters:
- Non-oil fiscal deficit was 14.9 percent of non-oil GDP in 2016, an improvement of 3.6 percentage points relative to the previous year.
- Projected increase of the non-oil fiscal deficit to 20.6 percent of non-oil GDP in 2017 (driven by a one-time banking support package in Kazakhstan and an extraordinary transfer from the Oil Fund to the Central Bank of Azerbaijan).
- Projected decline to 13.5 percent in 2018 as nonproductive public investment is reduced in Azerbaijan and Kazakhstan’s stimulus expires.
- Oil importers:
- Overall fiscal deficit rose to 4.6 percent of GDP in 2016, 1.5 percentage points larger than in 2015.
- Projected to decline to 3.4 percent in 2017 and 2.7 percent in 2018, conditional on implementation of consolidation plans (examples: lower public investment in Armenia, lower current expenditures in Georgia).
- Public debt concerns:
- Public debt has increased rapidly in many CCA countries and further increases are anticipated.
- On average, almost half of the increase in public debt reflects valuation changes from local currency depreciations since 2014.
- Recommendations include developing credible multiyear fiscal frameworks, identifying new income sources, reducing commodity-revenue dependence, and reviewing asset-liability management frameworks for sovereign wealth funds and reserves.
- Note: In some countries, borrowing by state-owned enterprises is not recognized as contingent liability, potentially underestimating consolidated government obligations.
External balances and current accounts
- Current account deficits widened in most CCA countries in 2016 due to external shocks since 2014.
- Oil exporters:
- Projected current account deficit of 3.2 percent of GDP in 2017 (improvement of 2.7 percentage points relative to the previous year), reverting effectively to 2015 levels.
- Projected improvement to 2.3 percent of GDP in 2018, supported by export acceleration from higher oil prices and improved external demand.
- Oil importers:
- Current account deficit set to widen to 8.7 percent of GDP in 2017 from 7.9 percent in the prior year, but marginally improve to 8.4 percent in 2018.
- Drivers include higher import prices (from higher oil prices and currency depreciation) partially offset by remittances and higher commodity export values.
Inflation and monetary policy
- Oil exporters:
- Inflation reached 11.5 percent last year (first double-digit reading in eight years).
- Projected to decline to 8.3 percent in 2017 and 7.6 percent in 2018.
- Factors: past depreciations (Kazakhstan, Azerbaijan), administrated price increases and import duties (Azerbaijan), and monetary policy shifts (Azerbaijan moving toward a free-floating exchange rate).
- Oil importers:
- Average inflation was 1.9 percent in 2016 (about 3 percentage points lower than in 2015); Tajikistan an exception with higher inflation.
- Projected to accelerate to 4.4 percent in 2017 and remain around 4 percent in 2018.
- Policy focus: As countries increase exchange rate flexibility, monetary policy should focus on inflation developments; improvements needed in policy instruments, central bank independence, analytics, and communications to support inflation-targeting and exchange rate flexibility.
Financial sector vulnerabilities and reform priorities
- Financial sector weaknesses:
- Restructured and overdue loans have increased; dollarization remains high; banks are undercapitalized.
- Credit growth is declining in several countries; lack of transparency and ownership issues weaken confidence; governance and limited supervisory independence impede resolution.
- Country actions and challenges:
- Armenia: Banks complied with higher minimum capital, prompting mergers and consolidation.
- Georgia: Strengthening regulatory framework and reducing dollarization underway.
- Azerbaijan: Capital injections and government purchases of bad loans continue; further bank closures may be needed.
- Kazakhstan: Merger of two largest banks underway, requiring significant public support.
- Tajikistan: Recapitalization plan for two major banks and liquidation of two smaller banks announced; regulatory forbearance and NPL resolution remain challenges.
- Recommended financial sector measures:
- Properly diagnose and remedy bank balance-sheet weaknesses; timely intervention of weak banks to avoid systemic risks.
- Provide public support only to viable systemic institutions, under strict conditions, with well-defined and fully collateralized guarantees; shareholders should not retain claims on assets when support is provided.
- Liquidate bad assets and allow new investors to purchase these assets via transparent, market-oriented approaches to promote competition.
- Avoid forbearance; improve corporate governance of state-owned enterprises; strengthen lending practices, crisis management frameworks, and enforcement of prudential regulations.
- Prompt resolution of financial sector issues can support growth and reduce potential fiscal pressures.
Structural reform imperative and downside risks
- The external shocks since 2014 increase urgency to diversify away from oil and other commodities and reduce reliance on remittances.
- Downside risks include geopolitical tensions, weaker-than-expected recovery undermining fiscal consolidation, and failure to address financial sector weaknesses leading to systemic risks.
- Reforms underway (examples): Kazakhstan’s 100 Concrete Steps; Georgia’s Four Point Reform Plan—both require reducing the role of the state and improving the business and legal environment.
- Risk of complacency: Firming commodity prices could delay reforms needed to boost long-term living standards.
Coverage, data conventions, and special notes
- The IMF MCD countries and territories covered: Afghanistan, Algeria, Armenia, Azerbaijan, Bahrain, Djibouti, Egypt, Georgia, Iran, Iraq, Jordan, Kazakhstan, Kuwait, the Kyrgyz Republic, Lebanon, Libya, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tajikistan, Tunisia, Turkmenistan, the United Arab Emirates, Uzbekistan, the West Bank and Gaza, and Yemen.
- Somalia is excluded from all regional aggregates due to a lack of reliable data.
- Syria data excluded for 2011 onward.
- 2011 Sudan data exclude South Sudan after July 9; data for 2012 onward pertain to current Sudan.
- Calendar-year data used except for: Afghanistan, Iran, Qatar, Egypt, Pakistan (specific fiscal-year notes apply).
- Tables: “oil” includes gas in Tables 3, 6, 13, and 14.
- REO aggregates constructed using GDP-PPP weights for domestic-economy composites and appropriate weighting rules for external aggregates as described in the publication.
- Projections are based on statistical information available through early April 2017 and assume established national policies are maintained.
Regional Economic Outlook: Middle East and Central Asia Update — https://www.imf.org/en/publications/reo/meca/issues/2017/04/18/mreo0517
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