Learning to Live With Cheaper Oil Amid Weaker Demand - Regional Economic Outlook: Middle East and Central Asia, January 2015 Update
Middle East and Central Asia, January 21, 2015
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- Published: January 21, 2015
- Series: Middle East and Central Asia
Overview and headline projections
- Global growth revised for 2015 to 3.5 percent (Table 1).
- Key country/region growth projections for 2015 (Table 1):
- U.S.: 3.6
- Euro Area: 1.2
- Emerging Markets: 4.3
- China: 6.8
- Russia: -3.0
- MENAP Oil Exporters: 3.4
- GCC: 3.9
- Non-GCC Oil Exporters: 4.9
- MENAP Oil Importers: 3.7
- CCA Oil Exporters: 4.9
- CCA Oil Importers: 1.5
Recent global and regional shocks
- Lower oil prices
- Oil prices declined by about 55 percent since September 2014.
- Market expectation: around $57 per barrel on average in 2015 (a decline of about 43 percent from the October 2014 REO baseline), rising gradually to $72 per barrel by 2019 (about 23 percent lower than projected in the October 2014 REO).
- Metals prices expected 13 percent lower in 2015–19 than projected in the October 2014 REO.
- Drivers: higher-than-expected supply (particularly from the United States) and weakening global demand (China, Japan, euro area); OPEC decision in late November not to cut production.
- High uncertainty: downside risks from weaker demand; upside risks from supply disruptions or OPEC cutting production.
- Weaker demand
- IMF global growth forecast for 2015 revised down by 0.3 pp to 3.5 percent.
- Russia: growth expected to shrink by 3 percent in 2015; revisions amounting to 3½ pp.
- Euro area revised down by 0.2 pp to 1.2 percent; China down by 0.3 pp to 6.8 percent.
- Spillovers to CCA: a temporary 1 pp fall in Russia's GDP growth estimated to lower growth in CCA oil exporters by 0.15 pp and in CCA oil importers by 0.4 pp in that year.
Impacts on oil exporters
- External and fiscal balances
- Large losses in export and fiscal revenues; oil export losses in 2015 estimated at:
- GCC: about $300 billion or 21 pp of GDP
- Non-GCC: about $90 billion or 10 pp of GDP
- CCA oil exporters: about $35 billion or 8 pp of GDP
- Current account implications:
- GCC current account surpluses projected to decline to 1.6 percent of GDP in 2015
- Non-GCC oil exporters likely post deficits around 5 percent of GDP
- CCA oil exporters likely post deficits around 2.7 percent of GDP
- Fiscal balances (selected, percent of GDP, Table 2):
- Bahrain: -5.4 (2014), -12.1 (2015)
- Kuwait: 21.9, 11.1
- Oman: -1.4, -16.4
- Qatar: 9.2, -1.5
- Saudi Arabia: 1.1, -10.1
- United Arab Emirates: 6.0, -3.7
- Algeria (Non-GCC): -7.4, -15.1
- Iraq: -4.9, -6.1
- Libya: -43.3, -37.1
- Azerbaijan (CCA): -2.3, -14.5
- Kazakhstan (CCA): 3.2 (2014)
- Turkmenistan: 1.4
- Uzbekistan: 0.2
- GCC fiscal surplus of 4.6 percent of GDP in 2014 projected to turn into a deficit of 6.3 percent of GDP in 2015; a downward swing of about 11 pp of GDP.
- Buffers and spending
- Most oil exporters have large buffers and financing capacity allowing avoidance of sharp immediate spending cuts; many are using buffers to limit near-term growth impact.
- Table 3 indicators (summary): availability of financial buffers varies; resource horizon and gross central government debt differ across countries; only some countries are “saving enough for intergenerational equity.”
- Expected spending adjustments: slowdown mainly in capital spending in GCC; current spending and public wage bills less likely to be cut significantly.
- Structural issues and recommendations
- Urgent need to tackle underpricing of energy products (energy subsidies remain well below international prices).
- Medium-term fiscal consolidation should be treated prudently as largely permanent shock; adjust medium-term plans to prevent major erosion of buffers and ensure intergenerational equity.
- Prioritize limiting current spending (wage and subsidy bills), careful appraisal of investment projects, explore non-oil revenue sources (income and value-added taxes), and deepen reforms to diversify economies away from oil.
Impacts on oil importers
- Direct gains and offsets
- Energy import bill reductions create breathing space; external gains in 2015 estimated on average at about 1½ pp of GDP in MENAP and 2 pp of GDP in the CCA.
- Countries estimated to gain most in 2015 (approx. pp of GDP): Morocco (about 4¾), Lebanon (about 4¼), Mauritania (about 3), Djibouti and Tajikistan (about 2½), Georgia (about 2¼), Jordan, Tunisia and Pakistan (about 2), Armenia (about 1¾).
- Gains partly offset by weaker external demand (Russia, euro area, China) and declines in other commodity prices for exporters of metals and minerals.
- Fiscal implications
- MENAP oil importers estimated to save about ½ pp of GDP in fuel subsidy savings in 2015.
- Fiscal balance changes (examples): Lebanon fiscal balance improved by 1¾ pp of GDP; Egypt improved by ½ pp of GDP relative to October 2014 REO projections. Kyrgyz Republic: 7¼ pp of GDP downward revision in fiscal balance due to Russia’s slowdown and large investment projects.
- MENAP oil importers expected to save most windfall gains; current account positions expected to improve by 1 pp of GDP relative to October 2014 REO projections.
- CCA oil importers: despite windfall gains, current account positions expected to deteriorate by about 1 pp of GDP relative to October 2014 REO projections because of weakening external demand from Russia and China.
- Growth and inflation
- Overall MENAP oil importers expected to grow at 3.9 percent in 2015 (unchanged from October 2014 REO).
- CCA oil importers growth revised downward by ½ pp in 2015 to 4½ percent.
- Limited pass-through of global oil price declines to domestic fuel prices in many MENAP oil importers (pass-through coefficients about 0.4 on average; lower in heavily subsidizing countries), reducing immediate impact on disposable incomes and input costs.
- Inflation impact limited in most oil-importing countries; in some cases exchange rate movements more important (especially CCA).
- Policy recommendations
- Save windfall gains where fiscal sustainability is a concern (Egypt, Jordan, Lebanon, Pakistan).
- Use lower prices as opportunity to continue fuel subsidy reforms with better targeted social safety nets (Egypt, Tunisia) and pursue tax reforms (Lebanon).
- Consider mixed strategy: allocate portion of windfalls to growth-enhancing investments while saving remainder to bolster buffers.
- Maintain transparent management of windfall revenue changes; maintain focus on medium-term fiscal consolidation.
Financial sector and markets
- Banks and resilience
- Near-term banking sector impact in oil exporters likely muted; downside risks rise over time due to second-round effects on asset quality, liquidity, and profitability.
- GCC banking systems expected to remain resilient due to high capital buffers, low NPLs, and high liquidity.
- Non-GCC risks: Algeria public banks’ exposures to state-owned enterprises; Yemen banks highly exposed to government debt; selected oil-importing countries (Egypt, Jordan, Lebanon) could face tighter liquidity if remittances decline.
- CCA banking systems: high capital adequacy and large buffers but vulnerabilities from high NPLs, high dollarization, unhedged foreign-currency borrowing, and exposure to Russia spillovers.
- Recommendation: financial supervisors should closely monitor exposures to oil price shocks and Russia-related spillovers.
- Markets and capital flows
- Stock markets in Iran, Kazakhstan, Kuwait, Saudi Arabia, UAE declined sharply in late 2014.
- Energy-related firms and banks with large oil-sector exposures face refinancing difficulties.
- Capital flows to GCC have slowed but remain broadly in line with other emerging markets.
Exchange rates, interest rates, and remittances
- Exchange rates and real effective terms
- Despite many dollar pegs, several local currencies depreciated against the U.S. dollar since June 2014 (Iran, Morocco, Tunisia: 6–13 percent depreciation since last June; Turkmenistani manat devalued by 23 percent earlier this month; Kazakh tenge devalued by 18 percent last February).
- Real effective appreciation in MENAP and CCA since last June (weaker euro and sharp ruble depreciation) could limit export prospects.
- Interest rate spillovers
- Expected U.S. monetary normalization likely to tighten financial conditions, particularly in GCC due to pegs, with delayed pass-through.
- Long-term yields in MENAP oil importers and GCC not much affected so far; CCA long-term yields have risen faster than emerging market trends.
- Remittances
- Ruble depreciation and Russia recession have depressed remittance values and amounts to CCA economies (notably Armenia, Kyrgyz Republic, Tajikistan), reducing liquidity in remittance-dependent countries.
Conflicts, security, and downside risks
- Persistent conflicts and security disruptions in Iraq, Syria, Afghanistan, Libya, Pakistan, Yemen continue to weigh on MENAP economic outlook, disrupt activity, and impede reforms.
- Downside risks include:
- Further declines in oil production or production disruptions (Iraq, conflict-affected countries).
- A deeper Russian recession and further ruble depreciation hurting CCA non-oil exports, remittances, and FDI.
- Prolonged low oil prices requiring significant fiscal adjustment in many countries.
Policy priorities and medium-term adjustments
- For oil exporters:
- Treat oil price decline as largely permanent and anchor adjustments with credible medium-term fiscal consolidation plans.
- Prioritize limiting current spending (including wage and subsidy bills) and pursue subsidy reforms already initiated in several countries (Azerbaijan, Bahrain, Kuwait, Qatar, Saudi Arabia, Turkmenistan, UAE; Oman discussing reforms).
- Appraise and prioritize investment projects; diversify revenue sources (income and VAT).
- Accelerate structural reforms to diversify economies away from oil, improve business environment, and increase private employment of nationals.
- For oil importers:
- Do not overestimate positive impact of lower oil prices; avoid irreversible spending commitments.
- Save windfall gains where fiscal sustainability is a concern; use part of gains for growth-enhancing investment where appropriate.
- Continue subsidy reforms with better targeted safety nets; consider tax reforms and maintain transparent management of windfall revenues.
- Maintain adequate foreign exchange buffers and adjust monetary policy to address inflation and exchange rate pressures where needed.
- Across the region:
- Strengthen institutional arrangements and transparency for managing oil-driven fiscal revenue changes.
- Step up structural reforms in business environment, governance, education, and trade integration to boost productivity, job creation, and inclusiveness.
Learning to Live With Cheaper Oil Amid Weaker Demand - Regional Economic Outlook: Middle East and Central Asia, January 2015 Update
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References
- IMF Data Portal: MCD REO Jan. 2015
- Falling Oil Prices Hurt Exporters across Mideast, Central Asia — IMF Survey Article
- Transcript of the Press Briefing
- Middle East & Central Asia Regional Economic Outlooks
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