Regional Economic Outlook: Middle East and Central Asia
Middle East and Central Asia, October 28, 2019
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Bibliographic details
- Published: October 28, 2019
- Series: Middle East and Central Asia
Regional overview
- The impact on growth in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region from global headwinds remains muted thus far, while growth in the Caucasus and Central Asia (CCA) region is stable.
- Growth is too low to meet the needs of growing populations.
- Risks to the outlook have increased and include global trade uncertainties, volatile oil prices, geopolitical tensions, and domestic vulnerabilities in some countries.
MENAP — oil exporters
- Growth for MENAP oil exporters, excluding Iran and conflict countries, will soften to 1.3 percent this year on lower and more volatile global oil prices, geopolitical tensions, and the global slowdown.
- With slowing productivity and rising fiscal vulnerabilities in some countries, expansionary fiscal policy would have only a modest impact on growth while reinforcing risks from a volatile oil market and lower projected oil prices.
- Reducing fiscal vulnerabilities combined with enhanced emphasis on structural reforms would boost private activity and attract investment, thus helping to lift productivity and potential growth.
MENAP — oil importers
- Growth projected at 3.6 percent this year and 3.7 percent in 2020.
- Easier global financial conditions provide temporary relief to MENAP oil importers, but the growth outlook remains muted.
- Elevated public debt is holding down growth in the region and creating acute fiscal stress amid global headwinds, volatile oil prices, and sustained social tensions.
- Policy recommendation: Growth-friendly fiscal consolidation and structural reforms can help boost growth and spur job creation, helping governments navigate the trade-off between reducing fiscal deficits and raising growth.
Capital flows — analytical findings
- Economies in the Middle East and Central Asia have seen a recent surge in portfolio inflows, now accounting for about 20 percent of the total portfolio inflows to emerging markets, relative to merely 5 percent before the global financial crisis.
- Foreign direct investment (FDI) has more than halved since 2008.
- Portfolio flows to the region’s economies are nearly twice as sensitive to global market sentiment compared to other emerging economies.
- If the VIX were to double from its 2018 level, portfolio inflows to the region would be halved, with the impact being stronger in oil-importing countries.
- Policy recommendations:
- Revitalize FDI by easing restrictions and promoting macroeconomic stability while deepening domestic financial markets to provide more stable sources of funding.
- Ensure fiscal sustainability, utilize macroprudential tools, and, where appropriate, allow for more flexible exchange rates to help contain risks from capital flow volatility.
- Deepen and develop domestic financial markets, especially through strengthening legal frameworks.
Fiscal institutions — analytical findings and recommendations
- Weak fiscal institutions in economies in the Middle East and Central Asia are associated with poor fiscal outcomes, rising debt and deficits, and procyclical fiscal policy.
- Improving fiscal institutions, including adopting and implementing flexible fiscal rules with monitoring and enforcement mechanisms, could slow the pace of public debt build-up by 4 percent of GDP on average across the region.
- Improving transparency and establishing a credible medium-term fiscal framework could also help reduce procyclicality of government spending, especially in the region’s oil exporters.
- Greater transparency combined with strengthened procurement processes could lower the volatility of discretionary government spending by 13 percent and improve the predictability of fiscal policy.
- Policy recommendations:
- Improve fiscal transparency, establish credible medium-term fiscal frameworks (MTFFs), and strengthen public financial management (PFM).
- Enhance procurement and move toward fiscal rules to mitigate vulnerabilities over time.
Additional analytical observations (full-text excerpts)
- Capital flows to the Middle East and Central Asian countries have been resilient even as global financial conditions tightened in 2014–16, helping finance current account and fiscal deficits and allowing for more gradual policy adjustments.
- As the region has become more integrated into global financial markets, portfolio and bank flows have nearly doubled over the last decade; foreign direct investment (FDI) has almost halved, reflecting weaker fundamentals.
- Governments need to seize the benefits of capital inflows while mitigating risks stemming from global financial market volatility, especially global risk sentiment, to which the region is twice as sensitive compared to other emerging market economies.
- Ensuring fiscal sustainability, utilizing macroprudential tools, and, where appropriate, allowing for more flexible exchange rates can help contain the risks from capital flow volatility.
Regional Economic Outlook: Middle East and Central Asia — October 2019
Content in this bundle
- cca-chapter-3
- Caucasus and Central Asia: Outlook and Policy Challenges;
- Global Development
- Menap Chapter1
- Menap Chapter2
- October 2019 MCD REO Chapter 4 - Capital Flows to MENAP and the CCA: Opportunities and Risks
- October 2019 MCD REO Chapter 5 - Fiscal Institutions and Fiscal Outcomes
- Middle East and North Africa Regional Economic Outlook Presentation; october 2019
- October 2019 Regional Economic Outlook: Middle East and Central Asia
- Dataset overview
- Reported Social Unrest Index
- stat-appendix-with-front-matter-and-fsi-tables
References
- Regional Economic Outlook: Middle East, North Africa, Afghanistan, and Pakistan Data
- Making the Most of Capital Flows in the Middle East and Central Asia
- Why Improving Fiscal Institutions is Critical to the Middle East and Central Asia
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