IMF Regional Economic Outlook: Middle East and Central Asia, April 2016
Middle East and Central Asia, April 25, 2016
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- Published: April 25, 2016
- Series: Middle East and Central Asia
Overview
- In 2016, low oil prices and deepening conflicts continue to weigh mightily on the economies of the MENAP region.
- Oil exporters face another year of heavily reduced oil export revenues and require ongoing fiscal consolidation and reforms to cope and diversify away from oil.
- Oil importers experience uneven and fragile growth, needing to adjust to spillovers from oil-exporting neighbors and the threat from conflicts.
- In the CCA, growth has hit a two-decade low amid low commodity prices, spillovers from the recession in Russia, and the slowdown in China.
MENAP Oil-Exporting Countries: Adjusting to Cheaper Oil
- Growth prospects revised down markedly since last October amid continued global oil market rout.
- Aggregate projections:
- Aggregate MENAP oil exporters' growth: 2 percent in 2015 to 3 percent in 2016 (mainly due to increased oil production in Iraq and post-sanctions Iran); GCC projected to slow further.
- Aggregate projection table excerpt (Real GDP Growth, 2014-17): 2014: 2.7; 2015: 1.9; 2016: 1.8; 2017: 3.1. (Subgroups shown: MENAP Oil Exporters, GCC, Iran, Countries in Conflict, Importers)
- New oil market reality:
- Oil prices fallen nearly 70 percent to about $40 a barrel since mid-2014.
- Futures markets anticipate recovery to $50 a barrel by the end of this decade (with much uncertainty).
- Large revenue losses:
- Export receipts in MENAP oil exporters declined by $390 billion in 2015 (17½ percent of GDP).
- Combined current account of the GCC and Algeria reversed to a projected deficit of about 8 percent of GDP in 2016.
- Deficit of other MENAP oil exporters projected at 4¾ percent of GDP in 2016.
- Fiscal deterioration and medium-term outlook:
- GCC and Algeria projected fiscal deficits averaging 12¾ percent of GDP in 2016 and remain at 7 percent over the medium term despite deficit-reduction measures.
- Other MENAP oil exporters combined deficit projected to average 7¾ percent of GDP in 2016 and gradually close by the end of the decade (assuming increased oil output and easing conflicts).
- Policy adjustment underway:
- Adjustment has mainly comprised spending cuts; new revenue sources being considered (examples: Oman—corporate income tax increase; Bahrain—tobacco and alcohol taxes; Iran—reduced exemptions and better tax administration).
- GCC planning to introduce a VAT in coming years.
- Energy price reforms: fuel, water, electricity charges raised in GCC; Oman and UAE introduced automatic pricing mechanisms; Algeria hiked fuel, electricity, natural gas prices; Iran increased fuel prices. Local energy prices remain well below global benchmarks.
- Algeria and Iran have allowed currency depreciation; GCC maintained pegs backed by substantial net foreign assets, but pressures in forward markets have increased.
- Further fiscal action needed:
- Cumulative fiscal deficits of the GCC and Algeria projected at almost $900 billion during 2016-21.
- Algeria, Bahrain, Oman, and Saudi Arabia will become significant debtors over this period as financing needs exceed liquid financial buffers.
- Suggested measures: further saving measures to restore fiscal sustainability and rebuild buffers; design timing/composition to minimize short-term growth impact; structural policies to complement fiscal adjustment.
- Savings and revenue potential: further energy price reforms could save some 2 percent of GDP; a 5 percent VAT could raise about 1½ percent of GDP.
- Financing and market implications:
- Deficits financed with asset drawdowns and debt issuance; some countries may issue more debt in 2016.
- Funding costs have risen with lower oil prices and rising U.S. interest rates; sovereign credit ratings downgraded; CDS spreads widened but remain below global financial crisis peaks.
- Growth prospects and risks:
- Aggregate MENAP oil exporters projected to rise to 2.9 percent in 2016 and 3.1 percent in 2017 from 1.9 percent in 2015, aided by Iran and assumed easing in conflict countries.
- Non-oil growth in the GCC projected at 3¼ percent over the next five years versus 7¾ percent in 2006–15.
- Risks tilted to the downside: fiscal consolidation drag, tighter financial conditions, possible further oil price drops (risk from China slowdown), protracted regional conflicts, faster-than-anticipated U.S. interest rate increases.
- Financial vulnerabilities and recommended financial policies:
- Deposit growth stalled; liquidity reduced; policy rate hikes in Bahrain, Kuwait, Saudi Arabia, UAE after Fed increase in December 2015.
- Authorities easing liquidity pressures via increased loan-to-deposit ratios (Saudi Arabia), cancelling T-bill auctions (Qatar), preparing central bank lending facilities (Algeria).
- Priorities: enhance financial surveillance, manage liquidity, operationalize central bank lending facilities, develop collateral regimes, enhance public debt management, strengthen cross-border supervisory cooperation.
- Structural reform priorities to reduce oil dependence:
- Improve business environment, reduce public-private wage gap, align education/skills with market needs, privatize state-owned enterprises (examples: Oman and Saudi Arabia plans).
- Iran's post-sanctions growth depends on domestic reforms.
- In conflict countries (Iraq, Libya, Yemen), improving security is a prerequisite.
MENAP Oil-Importing Countries: Gradual but Uneven Recovery
- Recent performance:
- After four years of stagnation, growth increased from 3 percent in 2011–14 to 3¾ percent in 2015 and projected to remain around that level in 2016–17.
- Unemployment remains high at 10 percent overall and 25 percent among the young.
- Drivers and constraints:
- Recovery supported by lower oil prices, less fiscal drag, reform progress; constrained by security disruptions, spillovers from regional conflicts, and slower growth in GCC trading partners.
- Reform experience: subsidy reforms helped stabilize public debt; targeted safety nets protected the vulnerable.
- External and reserve positions:
- Exports declining to main markets (euro area 35 percent of exports; China 5 percent).
- Current account deficit projected at 4½ percent of GDP in 2016 (unchanged for a third straight year).
- Reserve coverage set to rise by 1 month of imports to 6¼.
- Egypt: current account projected deficit 5¼ percent of GDP in 2016; reserve coverage at 3 months of imports; currency depreciated by 13 percent against the U.S. dollar in March 2016.
- Sudan faces low reserves and limited external financing.
- Inflation and monetary conditions:
- Inflation projected to fall to 6 percent in 2016 (a 1 percentage point drop from last year and a 3½ percentage point decline since 2014).
- Drivers: lower food and energy prices, currency appreciation against China and euro area (China and euro area account for 15 and 25 percent of imports, respectively).
- Downside risks:
- Worsening security, reform fatigue, increased spillovers, tighter global financial conditions, weaker growth in China and the GCC could all derail recovery.
- On the upside, faster improvement in domestic confidence could bolster growth.
- Fiscal positions and debt:
- Average fiscal deficit expected to fall to 6½ percent of GDP in 2016 from a 2013 peak of 9½ percent due mainly to subsidy reforms.
- Public debt ratios remain high in Egypt, Jordan, and Lebanon where they range between 90 and 145 percent of GDP.
- Recommendations: continue fiscal consolidation; revenue measures targeting higher income segments; technology-based tax collection; complete on-budget energy subsidy reforms; civil service and pension reforms to contain public wage bills; improve financial management; save fiscal gains where vulnerabilities are high or increase growth-enhancing spending where buffers are strong.
- Job creation and structural reforms:
- Need for much higher and more inclusive growth to create jobs and raise living standards.
- Structural reforms recommended: reduce cost of doing business, improve infrastructure quality, regulatory reform, align education with private sector needs, expand credit bureaus, increase trade openness.
Box 1 — Roadmap for Countries to Emerge From Conflicts (summarized)
- Conflicts in Syria, Iraq, Libya, Yemen have large humanitarian and economic costs: Syria's GDP less than half of pre-war level; Yemen real GDP per capita contracted by more than 40 percent since 2010.
- Spillovers: refugee-hosting countries face budget, infrastructure, and service pressures; decline in trade, investment, and tourism; weakened reform willingness.
- Policy responses: host countries, UN, relief agencies have developed plans (temporary employment subsidies, refugee schooling enrollment, support for local public services, infrastructure projects).
- International community must scale up coordinated support—both humanitarian and developmental—to rebuild infrastructure and strengthen regional resilience; pledges (e.g., February 2016 London conference) need timely on-the-ground translation.
Caucasus and Central Asia (CCA): Battered by External Shocks
- Growth and external environment:
- Growth slowed to a two-decade low; projected to decline to 1.2 percent in 2016 and recover only modestly in 2017.
- External shocks: oil prices projected to average around $35 a barrel in 2016 ($16 below the 2015 average); Russia’s economy expected to contract by about 1¾ percent in 2016; China's slowdown weakens external demand.
- Subgroup projections:
- Oil exporters: growth projected to decline to 1.1 percent in 2016 from 3.2 percent in 2015.
- Oil importers: growth projected at 2.6 percent in 2016, down from 3 percent in 2015.
- Exchange rate and reserve developments:
- All countries adjusted currencies since 2014; five adjusted by at least 30 percent as of February 2016.
- Reserves remain above 3 months of imports in all countries except Tajikistan (~1½ months).
- Some countries allowed considerable exchange rate flexibility (Georgia, Kyrgyz Republic, Kazakhstan); others managed more tightly or intervened heavily (Tajikistan, Turkmenistan, Uzbekistan).
- Inflation and monetary policy:
- Currency depreciations heightened inflationary pressures; Azerbaijan and Kazakhstan saw inflation reach double digits for first time in more than 15 years.
- Recommendation: modernize exchange rate and monetary policy frameworks; enhance central bank independence and transparency; adopt effective interest rate instruments as nominal anchors.
- Financial sector risks:
- Highly dollarized bank balance sheets weakened; liquidity declining due to slowing foreign currency earnings and capital flight; deposit dollarization rising.
- Credit risks and bank profitability weakening; increase in loss-making and undercapitalized banks leading to mergers/closures (Azerbaijan, Kazakhstan).
- Recommended actions: intensified monitoring of liquidity risks, regular stress-testing, strengthen supervision, macroprudential and crisis management policies; avoid forbearance.
- Fiscal policy response:
- Most countries allowed fiscal deficits to widen in 2015; with buffers declining and financing costs up, some countries started consolidation while others continue widening deficits.
- Oil exporters: fiscal deficit anticipated to widen by 1.7 percentage points of GDP to 4.9 percent in 2016.
- Oil importers: fiscal deficit projected to reach 4.9 percent of GDP in 2016, 1.4 percentage points higher than 2015.
- Recommendation: begin fiscal consolidation as cyclical conditions allow; preserve growth-enhancing expenditures; broaden tax bases; implement privatization plans where feasible.
- Structural reform priorities:
- Diversify away from commodities; improve business environment; raise education quality; strengthen governance; increase access to finance to foster private sector-led growth.
Key Statistical Assumptions and Indicators
- Working assumptions adopted for projections:
- Price of oil assumed to average US$34.8 a barrel in 2016 and US$41.0 a barrel in 2017.
- Six-month LIBOR on U.S. dollar deposits assumed to average 0.9 percent in 2016 and 1.5 percent in 2017.
- Regional projections and indicators (selected):
- MENAP regional averages and subgroup figures reported across growth, current account balances, overall fiscal balances, inflation, and other indicators in the publication's tables (2000–17 series).
- Note: 2016 and 2017 data in figures and tables are projections based on information through late March 2016; projections assume maintained policies of national authorities.
- Coverage and conventions:
- MCD countries and territories listed for statistical appendix; Somalia excluded from regional aggregates due to lack of reliable data.
- Simple average price of U.K. Brent, Dubai, and West Texas Intermediate used for oil price series.
Italic: IMF Regional Economic Outlook: Middle East and Central Asia, April 2016 (page overview).
Content in this bundle
- مستجدات: آفاق الاقتصاد الإقليمي : الشرق الأوسط وشمال إفريقيا وأفغانستان وباكستان: ابريل 2016
- عرض: الشرق الأوسط وشمال إفريقيا: آفاق الاقتصاد الإقليمي؛ 25 إبريل 2016
- مستجدات: آفاق الاقتصاد الإقليمي : الشرق الأوسط وشمال إفريقيا وأفغانستان وباكستان: ابريل 2016
- نشرة صندوق النقد الدولي — آفاق الاقتصاد الإقليمي
- 高加索和中亚：受到外部冲击的严重影响 -- 地 区 经 济 展 望 -- 更新 -- 2016 年4 月
- 高加索和中亚：受到外部冲击的严重影响 -- 地 区 经 济 展 望 -- 更新 -- 2016 年4 月
- _menap0416f
- _menap0416pf
- menap0416f
- Box 1. A Roadmap for Countries to Emerge From Conflicts
- Caucasus and Central Asia: Battered by External Shocks: Regional Economic Outlook; April 2016
- Regional Economic Outlook Update — Caucasus and Central Asia — April 2016
- Caucasus and Central Asia: Battered by External Shocks: Regional Economic Outlook; April 2016
- Regional Economic Outlook Update — Caucasus and Central Asia — April 2016
- CCA Region: Selected Economic Indicators, 2000–17
- Regional Economic Outlook for the Middle East, North Africa, Afghanistan, and Pakistan; April 2016
- Middle East and North Africa Regional Economic Outlook; presentation by Masood Ahmed; April 25, 2016
- Middle East and North Africa Regional Economic Outlook; presentation by Masood Ahmed; April 25, 2016
- MENAP Region: Selected Economic Indicators, 2000–17; MCD REO; April 2016
- MENAP Oil-Exporting Countries: Adjusting to Cheaper Oil
- MENAP Oil-Importing Countries: Gradual but Uneven Economic Recovery
- Regional Economic Outlook Update for the Middle East and Central Asia; April 2016
- Statistical Appendix -- Regional Economic Outlook: Middle East and Central Asia; April 2016
- Бюллетень «Перспективы развития региональной экономики» Кавказ и Центральная Азия Апрель 2016 года
- Перспективы развития региональной экономики — БЮЛЛЕТЕНЬ
- Перспективы развития региональной экономики БЮЛЛЕТЕНЬ
References
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- External Shocks Hurt Growth in Caucasus, Central Asia
- Cheap Oil Means a New Reality for Middle East, North Africa Region
- Breaking the Oil Spell: The Gulf Falcons' Path to Diversification
- All Reginal Reports on Middle East and Central Aisa
- Latest report—October 2015
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- Tax Policy Reforms in the GCC Countries: Now and How?
- Avoiding the New Mediocre: Raising Long-Term Growth in the Middle East and Central Asia.