Middle East and

Central Asia Regional

Economic Outlook
NOVEMBER, 2018

Jihad Azour
Director, Middle East and Central Asia
Department

INTERNATIONAL MONETARY FUND 1

 Outline
▪ A Changing Environment:
Gathering Storm Clouds?
▪ Regional Outlook

▪ Navigating Turbulent Waters

▪ Sustaining Inclusive Growth

▪ Key Takeaways

INTERNATIONAL MONETARY FUND 2

 Global growth prospects are weakening

Real GDP Growth of Trading Partners

(Arrows represent direction of revision since April 2018 WEO)

Global Europe China

8 United Kingdom

1
2017 18 19 2017 18 19 2017 18 19 2017 18 19

INTERNATIONAL MONETARY FUND 3

 Despite the recent surge, the medium-term
outlook for oil prices remains uncertain
Oil Prices Crude Oil Spot Prices
(US dollars per barrel) (US dollars per barrel)
140
120 → projections
APSP - Fall 17 120 Brent
100 APSP - Spring 18
APSP - Fall 18 WTI
Brent - Oct 18 100
80

80
60

40 60

20 Simple average of three spot prices; Dated Brent, 40

West Texas Intermediate, and the Dubai Fateh.
0 20
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Dec-22
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Oct-13
Feb-12

Feb-17
Dec-12

Oct-18
Apr-11

Apr-16
Jul-12

May-13
Nov-10

Aug-14

Jul-17

May-18
Nov-15

Dec-17
Sep-11

Sep-16
Jan-10
Jun-10

Mar-14

Jan-15
Jun-15
Sources: IMF Global Assumptions.
Note: These are baseline projections.

INTERNATIONAL MONETARY FUND 4

 ▪ A Changing Environment

▪ Regional Outlook:
Uneven and Fragile
▪ Navigating Turbulent Waters

▪ Sustaining Inclusive Growth

▪ Key Takeaways

INTERNATIONAL MONETARY FUND 5

 Growth in oil exporters rebounding this year and next
given higher oil production and stronger non-oil activity
Oil Exporters

86
Real GDP Growth 6 Non-Oil Real GDP Growth
(Weighted average, Percent) (Weighted average, Percent)
7

64 4

42 2

20 0

-2
0 -2
2017 2018 2019 2020-23 2017 2018 2019 2020-23

Average MENAP OE GCC Median Interquartile Range

INTERNATIONAL MONETARY FUND 6
 Modest growth under way in oil importers, with
some heterogeneity across countries
Oil Importers
Real GDP Growth
6 (Weighted average, Percent)

-2
2017 2018 2019 2020-23

Average MENAP OI Median Interquartile Range

INTERNATIONAL MONETARY FUND 7
 Economic conditions in countries affected by
conflict remain volatile and uncertain
Real GDP Growth
(Percent)
30
64
25

20

15

10

-5

-10

-15

-20
2015 16 17 18 19 15 16 17 18 19 15 16 17 18 19
Iraq Libya Yemen

INTERNATIONAL MONETARY FUND 8

 Recent recovery in oil prices having opposite
effects on oil exporters and importers
Oil Exporters Oil Importers

0
10
-1

5 -2

-3
0
-4

-5 -5

-6
-10
-7

-8
-15
2014 15 16 17 18 19
2014 15 16 17 18 19

Fiscal Balance (Percent of GDP)

Current Account Balance (Percent of GDP)

INTERNATIONAL MONETARY FUND 9

 Multiple and intertwined risks challenge
the region

Commodity
prices Geopolitical
uncertainty

Financial
conditions

Reform
Trade agenda
tensions

INTERNATIONAL MONETARY FUND 10

 Direct impact from trade tensions likely
small, but indirect effects could be large
Exports of Goods by Destination in 2017
(Share of total exports)

Oil Exporters Oil Importers

■ China ■ Turkey ■ US ■ Euro Area ■ UK ■ MENAP ■ Asia excl. China

■ Rest of the World

INTERNATIONAL MONETARY FUND 11

 Spreads widening as market sentiment and
financial conditions change
Financial Conditions in Emerging Sovereign Spreads²
Economies (Basis points)
LBN 316
(Indexed, April 2018 = 100) 200

Change to September 30th, 2018

120 EM Currencies 102 TUN

Tighter Conditions
115 EM Equities 150
EM Financial Conditions¹ - right scale
110 101

100 EGY
105

100 100
50 EMBIG
95
PAK
90 99 MAR JOR
0
QAT MECI
85 OMN
SAU UAE
80 98 -50
Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 0 100 200 300 400 500
Level on April 1st, 2018
¹Index includes the average of Brazil, China, Chile, India, Indonesia, Korea,
Mexico, Russia, South Africa, Thailand, and Turkey. ² JP Morgan EMBIG spreads are shown except for Bahrain, Oman, Qatar, Saudi
Arabia and UAE where MECI (Middle East Composite Index) spreads are used
instead.

INTERNATIONAL MONETARY FUND 12

 Fiscal financing risks rising in some countries
Gross Government Debt Government Interest Expense International Public Debt Maturing
(Percent of GDP, simple averages) (Change from 2018 to projected average in in 2019-23
90 2020-23, percent of GDP) (Percent of GDP, US$ billion)
30 120

LBN
14
Public corporations
80 2017 Increase Decrease Government
12 25 100
70 In US$ billion, RHS
2011

60 10
20 80

50 8

BHR
15 60
40

PAK
6

EGY
JOR
30 10 40

IRN
4

OMN

IRQ
20
5 20
2

SAU
10

MAR
0 0 0 0

QAT

BHR

UAE

KWT

JOR
OMN

TUN
LBN

SAU
GCC Non-GCC¹
MENAP Oil Exporters MENAP Oil
Importers
Sources: National authorities, IMF staff calculations, and Dealogic.
Notes: ¹Excludes Libya and Yemen.
INTERNATIONAL MONETARY FUND 13
 Geopolitical risks trending upwards, while
regional risks remain high
Global Geopolitical Risk EIU Security Risk
(Simple averages across countries, higher = riskier,
(GPR) Index September 2018)
100
250

200 80

150 60

100 40

50
20

0
0
Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

MENAP MENAP MENAP Oil SSA LAC EMASIA EMEU GCC and
Conflict Importers ALG+IRN
Countries¹

Source: Caldara, D and M. Iacoviello (2018), available at Source: Economist Intelligence Unit and IMF staff calculations.
http://policyuncertainty.com/gpr.html ¹Includes Iraq, Libya, Syria, and Yemen.

INTERNATIONAL MONETARY FUND 14

 ▪ A Changing Environment

▪ Regional Outlook

▪ Navigating Turbulent Waters:

Calibrating the Policy Mix
▪ Sustaining Inclusive Growth

▪ Key Takeaways

INTERNATIONAL MONETARY FUND 15

 External developments will constrain monetary
policy choices
Federal Funds Rate Capital Flow Pressures
(US$ million, rolling 3-month EPFR cumulative flows)
(Percent) 3,000 80,000
Market
Expectations for
2020: 2.9¹ 60,000
3.0 2,000

40,000
2.5
1,000
20,000
Sep-18, 2.25
2.0
0 0

1.5
-20,000
-1,000
1.0 -40,000

-2,000 MENAP Oil Exporters

0.5 MENAP Oil Importers -60,000

EM excl. MENAP (rhs)

-3,000 -80,000
0.0

Feb-17

Jul-17
Aug-17
Sep-17

Nov-17
Dec-17

Feb-18

Jul-18
Aug-18
Sep-18
Mar-17

May-17

May-18
Jan-18

Mar-18
Apr-17

Oct-17

Apr-18
Jan-17

Jun-17

Jun-18
2015 2016 2017 2018 2019 2020
¹As of October 30, 2018

INTERNATIONAL MONETARY FUND 16

 Scope for fiscal policy to be more growth-friendly
and equitable
Composition of expenditure items Composition of taxation items
(Averages 2017, percent of GDP) (Averages 2017, percent of GDP)

50 30
Other spending Other taxes
Gross capital formation Personal income tax
40
Social benefits

20
30

20
10

10

0
0
MENAP Oil MENAP Oil OECD EMs
MENAP Oil MENAP Oil OECD EMs
Exporters Importers
Exporters Importers
Sources: National authorities, and IMF staff calculations.
Note: EM = emerging market economies.
¹Other expenses include defense, consumption of fixed capital, subsidies, grants and other expense. MENAPOE excludes
Libya, Syria and Yemen.
INTERNATIONAL MONETARY FUND 17
 ▪ A Changing Environment

▪ Regional Outlook

▪ Navigating Turbulent Waters

▪ Sustaining Inclusive Growth:

Finding New Drivers of Growth
▪ Key Takeaways

INTERNATIONAL MONETARY FUND 18

 Broader financial sector development would
support private sector investment
Private Investment Contribution to Growth Credit to the Private Sector
(Simple averages, percentage points) (Percent of GDP, 2017)

Private investment Other Real GDP growth (percent)

6 120
Upper income economies
5 100

4 80

3 60

EMDE
2 40

1 20

0 0
2000-09 10-17 00-09 10-17 MENAP oil MENAP LAC EMASIA EMEU SSA
MENAP Oil Exporters MENAP Oil Importers exporters oil
importers

Sources: World Bank; IMF, International Financial Statistics; and IMF staff calculations.
Note: CCA = Caucasus and Central Asia; and MENAP = Middle East, North Africa, Afghanistan
INTERNATIONAL MONETARY FUND 19
 Need to improve infrastructure and education and
strengthen governance and institutions
Country-Specific Determinants of Private Investment
(R-squared statistics of individual second-stage regressions)
0.4
Infrastructure Education Governance Institutions

0.3

0.2

0.1

0.0

ICRG political risk

Access to electricity

DB getting electricity

WGI rule of law

Secondary school

WGI regulatory quality

Tertiary school enrollment

TI corruption percenptions
enrollment

index
Sources: World Bank World Development Indicators; IMF, World Economic Outlook; and IMF staff calculations. Notes: DB = Doing Business;
ICRG = International Country Risk Guide; WGI= World Governance Indicators; and TI = Transparency International

INTERNATIONAL MONETARY FUND 20

 Key Takeaways
▪ Growth is expected to continue at a modest pace, but remains uneven
▪ Risks of further tightening in global financial conditions and escalating trade tensions
▪ Political uncertainty and social tensions test the reform agenda in some countries, with
complacency a risk in others
Policy Response
▪ Monetary policy choices will be constrained. Where possible, flexible exchange rates
should serve as buffers in the event of external pressures
▪ Fiscal consolidation efforts should intensify to rebuild buffers and strengthen resilience
▪ There is scope to rebalance the fiscal adjustment to be more growth-friendly and
equitable
▪ Increasing access to education and finance, and strengthening governance and
institutions would attract private investment and drive growth that benefits all

INTERNATIONAL MONETARY FUND 21