IMF Sees Spending by Middle Eastern Oil Exporters Softening Global Financial Crisis Impact

Continued investment spending by Middle Eastern oil exporters is cushioning the impact of the global financial crisis on the entire region, IMF Middle East and Central Asia Department Director Masood Ahmed said yesterday in Dubai.

Discussing the economic outlook for the economies of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) at the Dubai International Financial Centre, he noted that the impact in terms of growth is being seen but it is more muted, thanks also to a stronger starting position in some countries.

The IMF expects the MENAP oil exporters,1 including the Gulf Cooperation Council nations, to grow at 3.6 percent in 2009, down from 5.6 percent in 2008.

"For the oil exporters, the decline in oil prices and OPEC production cuts are projected to reduce oil export receipts by almost 50 percent in 2009. This implies a loss of government revenue to the tune of US$300 billion compared to 2008," Mr. Ahmed said. "Nevertheless, most governments—especially those in the GCC—have so far indicated that they will maintain their spending and investment plans."

"As a result, oil exporters' current account surplus of around US$400 billion in 2008 is expected to turn into a deficit of US$30 billion in 2009. For most countries, this deterioration is from a position of significant strength, and thus can comfortably be sustained by the large stock of reserves that these economies have built up," Mr. Ahmed said.

"Thus, by continuing to spend, oil-exporting countries are contributing substantially to supporting global demand and are acting as stabilizers during the global downturn," he added.

"Emerging markets and developing countries in the region2 are projected to slow to 3.6 percent in 2009, from 6.3 percent in 2008. The global slowdown will clearly have a significant impact on growth through lower exports, tourism, remittances, and higher cost of credit. However, spending by oil exporters will soften this impact on countries that have strong trade and investment links with them," Mr. Ahmed said. "Because of the relatively high public debt ratios and the much more difficult financing outlook, the scope for counter-cyclical policies is limited for most of the emerging market countries."

"Risks to the outlook are tilted to the downside. The global economy is going through its most severe economic crisis since the Great Depression with global growth projected to be only 0.5% during 2009. Against this background, the risks to the outlook for the countries in the region include the following: First, if oil exporters cut their long-term oil price expectations and, consequently, their spending, growth prospects would be weaker for the entire region. Second, a more prolonged global recession would imply even weaker exports, tourism, and remittances for most MENAP emerging markets and developing countries. Finally, if asset price corrections deepen and the impact of asset price corrections feed through to corporate and, ultimately, bank balance sheets, some financial institutions in the region may be under stress," Mr. Ahmed concluded.