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29 October 2019

Middle East oil exporters remain exposed to global risks, says IMF

Uncertainties related to the future of Organisation of the Petroleum Exporting Countries and other major oil producers’ (OPEC+) production decisions and the pace of US oil output expansion add to bouts of oil price volatility.


The International Monetary Fund (IMF) said that growth in Middle East, North Africa, Afghanistan and Pakistan (MENAP) countries is expected to slow down by 0.7 per cent in 2019 from two per cent in 2018, due to oil production cuts in line with OPEC+ agreements, volatile oil prices as well as precarious global growth, increased fiscal vulnerabilities and heightened geopolitical tensions.

The Washington-based fund stated that against a backdrop of slowing global growth, ongoing trade tensions and renewed geopolitical risks, including recent attacks on Saudi Arabia’s oil facilities—oil prices remain volatile, swinging from $55 to $75 a barrel since the start of 2019.

Growth in the region is expected to be 1.3 per cent in 2019—a downward revision of 0.9 percentage point since April 2019—compared to 1.6 per cent in 2018, however, increased activity in the oil and gas sectors is expected to support a moderate pickup in growth in these countries to 2.8 per cent in 2020.

Additionally, the IMF said that downside risks are significant. Lower global demand and oil production may potentially dampen oil prices, business confidence and investment decisions, with adverse implications for growth and fiscal and external positions.

While increased bond and equity inflows can finance investment and stimulate growth, the IMF said that exposure to debt markets can also make the MENAP region more susceptible to developments in international financial markets.

Similarly, regional growth will also be constrained by a slowdown in productivity, amid reduced foreign direct investment flows due to geopolitical tensions and scope to improve the allocation of fiscal resources. The IMF stated that in this environment, further boosting demand through expansionary fiscal policy would heighten fiscal vulnerabilities and have only a modest impact on growth.

However, the IMF said that the implementation of ongoing infrastructure projects and improved credit conditions will reinforce the projected near-term recovery in growth of regional oil exporters. Kuwait, the UAE and Qatar are set to lift non-oil GDP growth from 2.4 per cent this year to 2.8 per cent in 2020—the UAE expects a boost in tourism from Expo 2020 and Qatar is expecting the same given its preparations towards hosting the 2022 FIFA World Cup.

Similarly, MENAP countries are benefiting from favourable global financial conditions. Interest rate cuts by the central banks in the UAE, Saudi Arabia and Bahrain as well as the inclusion of Tadawul in the MSCI EM Index and FTSE Russell bond indices—boosted debt and equity flows to many countries in the region in 2019 outperforming other emerging market economies.

The situation allowed a modest recovery in private credit growth in MENAP countries, partly supported by lower domestic interest rates in response to recent easing by the US Federal Reserve.





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