## 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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**Canonical URL:** [Learning to Live With Cheaper Oil Amid Weaker Demand - Regional Economic Outlook: Middle East and Central Asia, January 2015 Update](https://www.imf.org/en/publications/reo/meca/issues/2016/04/05/learning-to-live-with-cheaper-oil-amid-weaker-demand1)

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## Bibliographic details
- 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](http://data.imf.org/MCDREO)
- [Falling Oil Prices Hurt Exporters across Mideast, Central Asia — IMF Survey Article](https://www.imf.org/external/pubs/ft/survey/so/2015/CAR012115A.htm)
- [Transcript of the Press Briefing](https://www.imf.org/external/np/tr/2015/tr012115.htm)
- [Middle East & Central Asia Regional Economic Outlooks](https://www.imf.org/external/pubs/ft/reo/reorepts.aspx?ddlRegions=9&ddlYear=-1)
- [Ordering Information](https://www.imf.org/external/pubs/cat/longres.aspx?sk=41856.0)
- [Disclaimer](https://www.imf.org/external/terms.htm)
- [https://www.imf.org/external/ns/cs.aspx?id=29](https://www.imf.org/external/ns/cs.aspx?id=29)
- [https://www.imf.org/external/pubs/ft/gfsr/index.htm](https://www.imf.org/external/pubs/ft/gfsr/index.htm)
- [https://www.imf.org/external/ns/cs.aspx?id=262](https://www.imf.org/external/ns/cs.aspx?id=262)
- [https://www.imf.org/external/pubs/ft/reo/reorepts.aspx](https://www.imf.org/external/pubs/ft/reo/reorepts.aspx)
- [Sign up to receive free e-mail notices when new series and/or country items are posted on the IMF website.](https://www.imf.org/en/email-subscription/index)
- [Modify your profile](https://www.imf.org/en/email-subscription/login)
- [Seven Questions About The Recent Oil Price Slump](http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/)
- [January 2015 World Economic Outlook Update](https://www.imf.org/external/pubs/ft/weo/2015/update/01/index.htm)
- [October 2014 REO](https://www.imf.org/external/pubs/ft/reo/2014/mcd/eng/mreo1014.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/publications/reo/meca/issues/2016/04/05/learning-to-live-with-cheaper-oil-amid-weaker-demand1_