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Regional Economic
Outlook Update
Learning to
Live With Cheaper Oil Amid Weaker Demand
January
2015
|
|
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A large and possibly persistent decline in oil prices, and
slower-than-projected growth in the euro area, China, Japan, and Russia,
have substantially altered the economic context for countries in the Middle
East and Central Asia. The appropriate policy response will depend on
whether a country is an oil exporter or importer. A common theme, however,
is that these developments present both an opportunity and an impetus to
reform energy subsidies and step up structural reform efforts to support
jobs and growth.
Lower oil prices have weakened the external and fiscal balances of
oil exporters, including members of the Gulf Cooperation Council (GCC).
Large buffers and available financing should allow most oil exporters to
avoid sharp cuts in government spending, limiting the impact on near-term
growth and financial stability. Oil exporters should prudently treat the oil
price decline as largely permanent and adjust their medium-term fiscal
consolidation plans so as to prevent major erosion of their buffers and to
ensure intergenerational equity.
Gains from lower oil prices provide much-needed breathing space for
oil importers but will be offset by a concurrent decline in external demand,
particularly from Russia, but also from the euro area and China. Russia’s
sharp slowdown and currency depreciation have weakened the outlook for the
Caucasus and Central Asia (CCA) because of strong linkages through trade,
remittances, and foreign direct investment, suggesting the need for greater
exchange rate flexibility and near-term fiscal easing where financing
allows, along with stepped-up reform efforts.
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Table 1. Real GDP Growth, 2014 and 2015
|
|
|
|
|
|
|
|
|
|
World |
U.S. |
Euro Area |
Emerging Markets |
China |
Russia |
2014 |
3.3 |
2.4 |
0.9 |
4.4 |
7.4 |
0.6 |
2015 |
3.5 |
3.6 |
1.2 |
4.3 |
6.8 |
-3.0 |
2015 Revision from
Oct. 2014 WEO |
-0.3 |
0.5 |
-0.2 |
-0.6 |
-0.3 |
-3.5 |
|
|
MENAP Oil
Exporters |
GCC |
Non-GCC Oil
Exporters |
MENAP Oil
Importers |
CCA Oil
Exporters |
CCA Oil
Importers |
2014 |
2.7 |
3.7 |
1.5 |
3.0 |
5.2 |
4.7 |
2015 |
3.0 |
3.4 |
2.4 |
3.9 |
4.9 |
4.4 |
2015 Revision from
Oct. 2014 WEO |
-0.9 |
-1.0 |
-0.7 |
0.0 |
-0.8 |
-0.4 |
Note:
MENAP oil exporters (MENAPOE) comprise Algeria
(ALG), Bahrain (BHR), Iran (IRN), Iraq (IRQ), Kuw ait (KWT), Libya
(LBY), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), the United Arab
Emirates (UAE), and Yemen (YMN). The Gulf Cooperation
Council (GCC) comprises Bahrain, Kuw ait, Oman, Qatar,
Saudi Arabia, and the United Arab Emirates.
The non-GCC oil-exporting countries are Algeria,
Iran, Iraq, Libya, and Yemen.
MENAP oil importers (MENAPOI) comprise Afghanistan
(AFG), Djibouti (DJI), Egypt (EGY), Jordan (JOR), Lebanon (LBN),
Mauritania (MRT), Morocco (MAR), Pakistan (PAK), Somalia (SOM),
Sudan (SDN), Syria (SYR), and Tunisia (TUN).
CCA oil importers comprise Armenia, Georgia, the
Kyrgyz Republic, and Tajikistan.
CCA oil exporters comprise Azerbaijan, Kazakhstan,
Turkmenistan, and Uzbekistan. |
Recent Global and Regional Shocks
Lower Oil Prices
Oil prices have declined by about 55 percent since September 2014, and in
late November the Organization of the Petroleum Exporting Countries (OPEC)
decided not to cut production. Since then, markets expect oil prices to be
around $57 per barrel on average in 2015 (a decline of about 43 percent from
the October 2014 REO baseline) before rising gradually to $72 per barrel by
2019 (about 23 percent lower than projected in the October 2014 REO)
(Figure 1). Oil prices are expected to partially recover over the
medium term because of the likely decline in investment and future capacity
growth in the oil sector in response to lower oil prices.
Prices for other commodities have also declined, though not by as much as
oil prices. Metals prices, for example, are now expected to be 13 percent
lower in 2015–19 than was projected in the October 2014 REO. Baseline
forecasts for average gas prices remain broadly unchanged; however, some gas
exporters (Qatar) are facing lower gas prices because their contracts are
indexed to oil prices.1
The drop in oil prices is estimated to have been driven by both supply
and demand factors: higherthan-expected supply, particularly from the United
States, was not offset by production cuts by OPEC members, just as global
oil demand (especially from China, Japan, and the euro area) was weakening
(see the recent IMF blog post titled
Seven Questions About The Recent Oil Price Slump.
Uncertainty surrounding the future path of oil prices is high, pointing
to the possibility of short-term volatility. Downside risks stem from the
possibility of weaker-than-expected demand growth in key advanced or
emerging economies. Upside risks relate to the possibility of supply
disruptions – for example, in Iraq – or to a decision by OPEC to cut
production. Over the medium term, the outlook for is likely to depend on how
oil investment and production respond to lower prices. It will also depend
on whether OPEC resumes its role as the swing producer or whether prices
will be more strongly influenced by the marginal cost of shale oil
production.
Lower oil prices have different implications for oil exporters and
importers. A decline in prices results in losses in export and fiscal
revenues in oil-exporting countries, with possible knock-on effects on
government spending and non-oil economic growth. Oil-importing countries
gain from lower oil prices through reduced oil import bills and lower energy
subsidy bills. Higher disposable incomes and lower production costs could
contribute to the growth of domestic demand.
Weaker Demand
Despite a large decline in oil prices, the IMF forecast of global growth
for 2015 has been revised down by 0.3 pp to 3.5 percent (Table
1). The positive impact of lower oil prices on global growth is expected
to be more than offset by the negative effects of various cyclical and
policy factors. (For more details, see the
January 2015 World Economic Outlook Update
Growth forecasts for the euro area, Japan, and some emerging economies,
particularly China and Russia, have been revised down. Russia’s economy is
now expected to shrink by 3 percent in 2015, with growth revisions amounting
to 3½ pp (Figure 2), because of lower oil prices and
increased geopolitical tensions. Forecasts for the euro area have been
revised downward by 0.2 pp to 1.2 percent, and for China by 0.3 pp to 6.8
percent. These revisions are owing to both cyclical factors and slower
potential growth.
The CCA countries will be affected by Russia’s deepening recession
through multiple channels, especially trade, remittances, foreign direct
investment (FDI), and risk premiums. A temporary fall of 1 pp in Russia’s
GDP growth in a given year is estimated to lower growth in the CCA oil
exporters by 0.15 pp and in the CCA oil importers by 0.4 pp in that year.
(See Box 3.1 in the
October 2014 REO). China’s slowerthan-expected growth will also have
negative effects on growth in the CCA. Among the MENAP oil importers,
Maghreb 2
countries will face weaker export prospects because of slower-than-expected
growth in the euro area, while Mashreq 3
countries could be affected by lower remittances, FDI, and tourism from the
GCC.
Declines in prices of other commodities, which some oil-importing
countries in the region export (for example, copper in Armenia, gold in the
Kyrgyz Republic, and iron in Mauritania), will offset gains stemming from
lower oil import bills (Figure 3).
Higher Interest Rates, Stronger Dollar, and Weaker Ruble
Global interest rate and exchange rate developments, which are largely
driven by the expected normalization of U.S. monetary policy, also have a
bearing on the regional outlook, albeit to a lesser extent than declines in
commodity prices and external demand. The expected increase in U.S. interest
rates is likely to tighten financial conditions in the MENAP and CCA
regions, particularly in the GCC because of their exchange rate pegs, and to
dampen the growth of private credit (Figure 4). These
interest rate spillovers are likely to occur with a delay because of slow
pass-through.
So far, long-term yields in the MENAP oil importers and the GCC have not
been affected much by concerns about tightening U.S. monetary policy. Large
fiscal and external buffers in the GCC, and declines in MENAP oil importers’
country risk premiums, resulting from recent progress in reforms, caused
their long-term yields to decline since the start of the “taper talk” in May
2013, in contrast to developments in emerging market yields (Figure
5). CCA long-term yields have recently risen faster than emerging
market trends, in part because of the region’s exposure to Russia.
Despite a predominance of dollar pegs in the GCC and other managed
exchange rate regimes in the MENAP and CCA regions, a number of local
currencies have depreciated against the U.S. dollar since oil prices started
to fall in June 2014 (Figure 6).
In the MENAP region, currencies in Iran, Morocco, and Tunisia depreciated
by 6–13 percent against the dollar since last June, with a corresponding
reduction in the magnitude of the oil price shock measured in local
currency. Currencies of the CCA oil importers (Armenia, Georgia, the Kyrgyz
Republic, and Tajikistan) have also come under pressure, in the face of
rapid depreciation of the Russian ruble. Among the CCA oil exporters, the
Turkmenistani manat was devalued by 23 percent earlier this month, and the
Kazakh tenge was devalued by 18 percent last February.
Despite nominal exchange rate depreciations, currencies of MENAP and CCA
countries have appreciated in real effective terms since last June
(reflecting the weaker euro and sharp depreciation of the Russian ruble),
risking to limit prospects for increased exports from these regions (Figure
7).
The sharp depreciation of the ruble has also depressed the value of
remittances from Russia, which account for a significant share of some CCA
economies (particularly Armenia, the Kyrgyz Republic, and Tajikistan). In
addition, the amounts of remittances are declining because of the recession
in Russia and, possibly, a declining number of CCA migrant workers.
Banks Exposed But Resilient
The impact of lower oil prices on oil exporters’ banking systems is
likely to be muted in the near term, but downside risks are likely to
increase over time. Second-round effects of lower oil prices on economic
activity could weaken asset quality, liquidity, and profitability, but the
speed of adjustment is likely to vary across countries. GCC banking systems
will be affected by the decline in oil prices, given the strong correlation
between non-oil growth and government spending, but they should remain
resilient owing to their high capital buffers, low nonperforming loans
(NPLs), and generally high liquidity (Figures 8–9).
Outside the GCC, a source of risk in Algeria’s banking system is the
public banks’ extensive and direct exposures to large state-owned
enterprises in various industries, which are subject to fiscal strains as a
result of lower oil prices. Yemen is at high risk because its banks are
highly exposed to government debt against the backdrop of a weak fiscal
position and limited financing options. Selected oil-importing countries
(such as Egypt, Jordan, and Lebanon) for which remittances are a major
source of liquidity could experience tighter liquidity conditions if
remittances decline.
Banks in the CCA have high capital adequacy ratios and the countries have
large financial buffers but banking systems are more vulnerable to shocks
because of credit risk and structural vulnerabilities. Some countries (such
as Azerbaijan, Kazakhstan, and Tajikistan) are starting from positions of
weakness: high NPLs and high dollarization, particularly unhedged borrowing
in foreign currency, expose banks to market-induced credit risks, and
preclude them from accessing the central banks as lender of last resort.
Large spillovers from Russia’s slowdown, lower remittances, and financial
distress also heighten credit and liquidity risks.
Overall, high state involvement in the financial sector across the
region, and the strong link between the oil and non-oil economies, on the
one hand, and fiscal performance, on the other hand, suggest that financial
supervisors need to closely monitor financial sector vulnerability to oil
price shocks. Likewise, CCA bank supervisors need to be vigilant regarding
exposures of their financial sectors to spillovers from Russia’s slowdown
and financial market distress.
Conflicts and Security Disruptions
Conflicts, terrorism, and related security disruptions continue to be a
prevailing concern in the region. Although airstrikes have slowed the
advance of the so-called Islamic State (ISIS), conflicts in Iraq and Syria
persist, creating significant economic and political spillovers for
neighboring countries (especially Jordan and Lebanon). The security
situations in Afghanistan, Libya, Pakistan, and Yemen also remain
challenging. Conflicts cast a shadow over the economic outlook for the MENAP
region, not only because they disrupt economic activity; they also reduce
political space for the much-needed reforms and delay the return of
confidence to the MENAP region.
Oil Exporters
Oil exporters in the MENAP and CCA regions are faced with substantial
losses in government revenues and exports as a result of the large decline
in oil prices. Many countries have significant buffers in the form of
foreign assets that will allow them to avoid steep spending cuts and limit
the drag on growth. For countries in the CCA, the impact of lower oil prices
is compounded by the deepening recession in Russia, to which they are
closely linked through trade, remittances, and foreign direct investment
(FDI), and by slowing growth in China, another important trading partner.
But the consequences for economic growth in these countries will likely be
mitigated by countercyclical expenditure policy.
Across both regions, with buffers eroding at varying speeds, most
countries will need to re-assess medium-term spending plans and, if lower
oil prices persist for a prolonged period, will need to adjust gradually to
the new realities in the global oil market. Some countries that do not have
significant buffers or borrowing capacity will need to adjust more quickly,
with adverse consequences for economic growth. In all oil-exporting
countries, deepening economic reforms aimed at diversifying economies away
from oil, and encouraging growth and job creation, would help mitigate any
adverse effects of fiscal consolidation on growth.
Large Losses for Oil-Dependent Economies
The large decline in oil prices will lead to significant revenue losses
for oil exporters in the MENAP and CCA regions because most of these
economies are highly dependent on oil. Oil exports account, on average, for
two-thirds of total exports in the MENAP and CCA oil exporters (Figure
10).
Oil export losses in 2015 are expected to reach about $300 billion or 21
pp of GDP in the GCC, about $90 billion or 10 pp of GDP in the non-GCC, and
about $35 billion or 8 pp of GDP in the CCA oil exporters. The countries
that will be most affected are Kuwait, Qatar, Iraq, Oman, Libya, and Saudi
Arabia.
As a result, current account surpluses are projected to decline this year
to 1.6 percent of GDP in the GCC, while non-GCC oil exporters and CCA oil
exporters will likely post deficits of around 5 percent and 2.7 percent of
GDP, respectively (Figure 11).
Fiscal revenues will also decline because oil export revenues are
captured almost entirely by governments in the MENAP and CCA countries. Most
oil exporters need oil prices to be considerably above the $57 projected for
2015 to cover government spending, which has increased in recent years in
response to rising social pressures and infrastructure development goals (Figure
12).
As a result, the oil price decline is expected to significantly erode
fiscal positions across the region (Figure 13). Except for
Kuwait, Turkmenistan, and Uzbekistan, all countries in the region are
expected to run fiscal deficits in 2015 (Table
2). The GCC fiscal surplus (4.6 percent of GDP in 2014) is now projected
to turn into a deficit of 6.3 percent of GDP in 2015; a downward swing of
about 11 pp of GDP.
On current policies, and assuming a partial recovery of oil prices in
line with futures markets, fiscal balances could gradually improve over the
medium term while remaining in deficit in most countries.
|
Table 2. Fiscal Balances, Oil Exporters
|
(Percent of GDP)
|
|
|
2014 |
2015 |
|
GCC |
|
|
Bahrain |
-5.4 |
-12.1 |
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 |
Non-GCC |
|
|
Algeria |
-7.4 |
-15.1 |
Iran, Islamic Republic of |
-1.4 |
-3.4 |
Iraq |
-4.9 |
-6.1 |
Libya |
-43.3 |
-37.1 |
Yemen, Republic of |
-5.4 |
-5.2 |
CCA |
|
|
Azerbaijan |
-2.3 |
-14.5 |
Kazakhstan |
3.2 |
-2.3 |
Turkmenistan |
1.4 |
0.0 |
Uzbekistan |
0.5 |
0.2 |
|
>3%
of GDP |
0-3%
of GDP |
<0%
of GDP |
Sources: National authorities; and
IMF staff estimates. |
Even after the reduction in oil prices, energy prices charged to
consumers remain well below international prices in most oil exporters.
These ‘energy subsidies’ are not reflected in the budget but persist as
important foregone revenue and as a reason for the exceptionally fast growth
of energy consumption in these countries (Figure 14).
The new fiscal realities facing most oil exporters make it all the more
urgent to begin tackling the underpricing of energy products in
oil-exporting countries in both the MENAP and CCA regions.
Weaker Stock Markets
Stock markets in a number of countries, including Iran, Kazakhstan,
Kuwait, Saudi Arabia, and the United Arab Emirates, declined sharply in late
2014 because of rising concerns about how their economies will be affected
by lower oil prices, and particularly as to whether governments, which have
been key drivers of corporate earnings, would cut spending in response to
lower oil prices (Figure 15). The decline in equity prices
may weigh on consumption, but the effects should be manageable.
Energy-related firms and banks with large exposures to the oil sector are
facing more difficult refinancing conditions because lower oil prices are
expected to lower their earnings and creditworthiness. Capital flows to the
GCC have also slowed, though they remain broadly in line with trends for
other emerging markets (Figure 16).
Avoiding Sharp Cuts in Spending
Most oil-exporting countries in the MENAP and CCA regions have
significant fiscal buffers, which allow them to avoid sudden cuts in
spending in response to declining oil revenues (Table
3). GCC countries, which are expected to be most severely
affected by the decline in oil prices in terms of revenue losses, and which
generally peg their currencies to the dollar, have large financial assets
and borrowing capacity to help cushion the impact on near-term growth.
Nevertheless, most GCC countries (except Qatar) are now expected to slow
spending growth in 2015 compared to what was projected in the October 2014
REO, resulting in a decline in their non-oil fiscal deficits (Figure
17).
These declines are much smaller than the loss of fiscal revenues,
suggesting that countries are using their fiscal buffers.
|
Table 3. Size of Financial Buffers and Resource Horizons
|
|
|
Availability of financial buffers in the short run 1 |
Resource horizon (2012) 2 |
Gross central government debt (percent of GDP, 2013) 3 |
Saving enough for intergenerational equity? 4 |
|
GCC |
|
Bahrain |
limited |
14 |
43.9 |
No |
Kuwait |
Substantial |
122.7 |
3.2 |
No |
Oman |
limited |
32.8 |
7.3 |
No |
Qatar |
Substantial |
159.6 |
34.3 |
No |
Saudi Arabia |
Substantial |
80.1 |
2.7 |
No |
United Arab Emirates |
Substantial |
117.9 |
11.7 |
No |
Non-GCC |
|
Algeria |
Substantial |
55.3 |
9.3 |
No |
Iran, Islamic Republic of |
limited |
209.5 |
11.3 |
N/A |
Iraq |
limited |
131.9 |
31.3 |
No |
Libya |
Substantial |
126.8 |
N/A |
No |
Yemen, Republic of |
limited |
63.1 |
48.2 |
No |
CCA |
|
Azerbaijan |
Substantial |
27.8 |
13.8 |
No |
Kazakhstan |
Substantial |
65.6 |
12.9 |
No |
Turkmenistan |
Substantial |
271.9 |
20.5 |
Yes |
Uzbekistan |
Substantial |
N/A |
8.5 |
N/A |
|
|
4 years and above |
>40 |
<40 |
Yes |
|
3 years and below |
20<x<40 |
>40 |
No |
|
<20 |
|
|
1 Source: Calculations based on
years until public net foreign assets turn negative, assuming no
fiscal adjustment.
2 Source: Ratio of proven reserves to total oil and
natural gas production (2012 figures from Annex 3 in Fall 2013 REO).
3 Source: Fall 2014 REO.
4 Source: Figure 1.8 (Fall 2014 REO) and Figure A3.3
(Fall 2013 REO). |
In the GCC, most of the slowdown in spending is expected to affect
capital spending. By contrast, current spending, particularly on public wage
bills, is unlikely to change significantly, though some countries are
reforming their energy subsidies. Reducing subsidies and other current
spending would be preferable to reducing capital spending because the former
would likely exert a smaller drag on economic growth while addressing fiscal
rigidities. Identifying additional sources of non-oil revenue would support
efforts to contain spending.
Some CCA oil exporters, faced with the twin shocks of lower oil prices
and the deepening recession in Russia, are expected to increase government
spending. Azerbaijan and Kazakhstan are expected to use their fiscal buffers
and borrowing to provide a fiscal stimulus, leading to some deterioration in
their non-oil fiscal balances. By contrast, Turkmenistan and Uzbekistan
intend to maintain their earlier spending plans because prices for their gas
exports have not been affected by the decline in oil prices. Although fiscal
stimulus in response to adverse developments may be appropriate in some
cases, countries would be well advised to maintain a cautious approach to
fiscal policy, because a prolonged period of lower oil prices would
ultimately require significant adjustment in most countries.
Countries with low or inaccessible buffers face more immediate adjustment
needs, and some have taken appropriate initial steps in this direction. For
example, Yemen, although lower oil prices will have a smaller revenue impact
on its economy compared to other oil exporters, is planning to increase
non-oil revenue collection, contain the government wage bill, and continue
fuel subsidy reform. A large financing gap in Iraq’s 2015 draft budget will
force a reduction in current and capital spending. In Libya, fiscal
adjustment is occurring through capital spending because of political
instability. In Algeria, lower current transfers and additional tax revenues
should drive the fiscal adjustment in response to lower oil prices.
Limited Impact on Growth and Inflation over the Near Term
With most MENAP and CCA countries expected to use buffers in response to
lower oil revenues in the next two years, the near-term impact of lower oil
prices on non-oil growth is likely to be contained. As a result, regional
spillovers from major oil-exporting countries, particularly from the GCC to
the Mashreq and sub-Saharan Africa, through remittances, non-oil imports,
and/or outward investment are generally expected to be limited in the near
term. In a few financially constrained MENAP oil exporters (Iran, Iraq,
Yemen), growth will likely slow in the next two years. In the CCA oil
exporters, growth has been revised downward in the near term because of the
larger-than-expected slowdown in Russia.
Overall, we expect growth in the GCC of around 3.4 percent in 2015, a
downward revision of 1 percentage point relative to the October 2014 REO.4
In the non-GCC oil exporters, growth is revised down by 0.7 pp in 2015 to
2.4 percent. In the CCA oil exporters, growth is expected at about 4.9
percent this year, 0.8 pp below the October 2014 REO forecast.
The impact of declining oil prices on inflation in MENAP and CCA oil
exporters is likely to be subdued because most countries use administered
prices for fuel products. Countries with a more flexible exchange rate (for
example, Iran) would need to be vigilant and tighten monetary policy if
lower oil revenue leads to a sharp depreciation of the exchange rate and
higher inflation. CCA countries that are facing simultaneous external shocks
can allow more exchange rate flexibility. These countries should maintain
adequate foreign exchange buffers so that they can address potential
financial stability concerns, and should adjust monetary policy both to
address emerging signs of inflation pressures and to limit exchange rate
pressures.
Oil production and evolving conflicts in the region constitute important
downside risks to the outlook. Regional OPEC oil producers are not expected
to cut oil production under baseline projections, but apparent oversupply in
the global oil market suggests that the risks for oil production are skewed
to the downside. In addition, countries in conflict or difficult security
situations (Iraq, Libya, Yemen) or facing a difficult external environment
(Iran) could also suffer from declining oil production and/or face downside
risks from conflict-induced disruptions in non-oil economic activity. A
deeper recession in Russia and a further depreciation of the ruble could
have an additional negative impact on non-oil exports from CCA oil
exporters.
Need to Adjust and Diversify over the Medium Term
As the decline in oil prices could prove to be persistent, most oil
exporters in the region may well need to adjust their fiscal positions to
the new realities of the global oil market to ensure that they maintain
fiscal sustainability.
The adjustment would need to be anchored by credible medium-term fiscal
consolidation plans and would require limiting current spending, including
wage and subsidy bills. Although some countries have already initiated
subsidy reforms (Azerbaijan, Bahrain, Kuwait, Qatar, Saudi Arabia,
Turkmenistan, the United Arab Emirates) or started discussing them (Oman),
energy subsidies still remain large in the region. Falling oil prices could
make such reforms both more urgent and, possibly, politically easier to
implement.
Careful prioritization and appraisal of sizable investment projects would
also be important to ensure medium-term growth dividends. Priority projects,
including large foreign-financed projects in some CCA countries, should move
forward. Countries also need to explore possibilities for diversifying
revenue sources, which could include income and value-added taxes.
Accompanying measures that would help limit the adverse impact of fiscal
consolidation on the growth of the non-oil economy include deeper reforms to
diversify economies away from oil, particularly by improving the business
environment, creating incentives for private entrepreneurship in the
tradable goods sectors, and increasing private employment of nationals. CCA
countries, in particular, should accelerate structural reforms to liberalize
their economies, especially reforms to ease business regulation and
strengthen competition. Institutional arrangements and transparency for
dealing with oil price—driven changes in fiscal revenues also need to be
strengthened.
Oil Importers
Oil importers in the MENAP and CCA regions are benefiting from lower
oil prices. Energy import bills are reduced and, where lower oil prices are
passed on to end-users, production costs decline and disposable income
rises.
Yet in most oil-importing countries gains from lower oil prices are
offset by other adverse factors, such as slower-than-expected domestic
demand growth and a weaker-than-expected outlook for growth in the key
trading partner countries: the euro area and GCC, for MENAP oil importers,
and Russia and China, for CCA oil importers. In addition, some countries
export non-oil commodities, the prices for which have been declining. As a
result, the impact on growth and on fiscal and current account deficits is
mixed, with expected improvements in some countries but a worsening in
others, especially in the CCA countries, which have been strongly affected
by a deepening recession in Russia.
Lower oil prices create favorable conditions for continuing subsidy
reforms and for stepping up structural reform efforts to support medium-term
growth and job creation. However, oil importers should not overestimate the
positive impact of the decline in oil prices on their economies: demand
growth is weak in trading partner countries and there is considerable
uncertainty about the persistence of lower oil prices and the availability
of external financing.
Sizeable Gains in Only a Few Cases
The sharp drop in oil prices has reduced energy import bills in MENAP oil
importers. External gains from lower oil prices in 2015 are estimated, on
average, at about 1½ pp of GDP in the MENAP and 2 pp of GDP in the CCA (Figure
18).
Countries estimated to gain most from lower oil prices in 2015 are
Morocco (about 4¾ pp of GDP), Lebanon (about 4¼ pp of GDP), Mauritania
(about 3 pp of GDP), Djibouti and Tajikistan (about 2½ pp of GDP), Georgia
(about 2¼ pp of GDP), Jordan, Tunisia and Pakistan (about 2 pp of GDP), and
Armenia (about 1¾ pp of GDP).
The windfall gains are generally smaller than oil exporters’ losses
because MENAP and CCA oil importers depend much less on oil than
oil-exporting countries do (Figure 18). Also, declines in global oil prices
are generally transmitted with significant lags to the CCA countries because
their oil import prices are typically fixed for periods of several years.
Unless governments choose to lower the pump prices of petroleum products,
lower international oil prices will also result in fiscal gains through
reduced fuel subsidy bills. These savings are estimated at about ½ pp of GDP
for the MENAP oil importers in 2015 (Figure 19). Gains are
particularly large in Egypt, where subsidy bills remain high despite
recently initiated reforms; whether those gains will accrue to the budget
will depend on country-specific arrangements between state oil companies and
the government. CCA oil importers do not subsidize fuel through government
budgets. Their energy subsidies are not expected to decline because they
tend to depend on gas prices, which are projected to remain stable in the
near term.
Fiscal Policy Responding to Multiple Shocks
Among MENAP countries benefitting most from lower oil import bills,
fiscal balances are expected to improve (compared to projections in the
October 2014 REO) in Lebanon (by 1¾ pp of GDP) and Egypt (by ½ pp of GDP) (Figure
20).
In other MENAP oil importers, fiscal balances are now projected to be
weaker this year than was projected in the October 2014 REO (for example,
Djibouti and Tunisia), in part owing to weaker-thanexpected domestic demand
growth and scaling-up of public investment. In the Kyrgyz Republic, Russia’s
slowdown and large investment projects have led to a 7¼ pp of GDP downward
revision in the fiscal balance.
Partially Saving Windfall Gains
Overall, MENAP oil importers are expected to save most of their
oil-related windfall gains. Their current account positions are expected to
improve by 1 pp of GDP (compared to projections in the October 2014 REO).
This improvement is broadly in line with the oil-related windfall gains
estimated at about 1½ pp of GDP. MENAP countries do face the risk of a
possible decline in remittances, official financing, FDI, and tourism from
the GCC countries, albeit over the medium term.
By contrast, current account positions in the CCA oil importers are
expected to deteriorate by about 1 pp of GDP from projections made in the
October 2014 REO, which compares to about 2 pp of GDP of windfall gains from
lower oil prices. The main reason is a significant weakening in external
demand from Russia and, to a lesser extent, China. Additional current
account pressures arise for countries that export minerals and other
commodities (Figure
3) and that recently experienced domestic real currency appreciation (Figure
7).
Limited Impact on Growth and Inflation
The impact of lower oil prices on growth is likely to be limited in the
MENAP and CCA oil importers.
First, low pass-through from global oil prices to domestic fuel prices
limits the impact on disposable incomes and input costs of firms in MENAP
oil importers. The pass-through coefficients in these countries are about
0.4 on average and are much lower for some countries that continue to
subsidize domestic fuel prices (Egypt, Tunisia). Pass-through in the CCA oil
importers is greater, because of more flexible price-setting mechanisms.
Second, some MENAP and CCA oil importers are facing simultaneous external
demand shocks from weaker-than-expected growth in the euro area and Russia,
as well as slower-than-expected progress in domestic reforms and delays in
return of confidence.
In the CCA oil importers, negative spillovers from Russia overshadow the
relief from lower oil prices, leading to a downward revision of growth by ½
pp in 2015 compared to the October 2014 REO, to 4½ percent (Table 1).
Downward revisions in Maghreb countries (especially Morocco and Tunisia),
which are most affected by spillovers from the euro area, are about 0 to ¾
pp. Mashreq countries (for example, Egypt) are less affected because growth
in the GCC countries, to which they are most exposed, is expected to be only
modestly weaker. (Growth in Egypt in 2015 has been revised upward by 0.3 pp,
in part owing to a strong rebound in Q3 2014.) Overall, MENAP oil importers
are expected to grow at 3.9 percent in 2015, unchanged from the October 2014
REO.
In most CCA and MENAP oil importers, lower oil prices are unlikely to
have a large direct effect on domestic inflation because of the small share
of fuels in the CPI baskets and, in some cases, these effects are offset by
subsidy reforms. In some countries (Egypt, Tunisia) domestic fuel prices are
subsidized and are not expected to move in line with global prices. In some
countries (most CCA oil importers), exchange rate movements are a more
important factor influencing inflation.
Over the Medium Term
If lower oil prices prove to be persistent, oil importers will face the
question of whether to continue spending or save the windfall gains. It is
important not to over-estimate the positive impact of the oil price shock on
the oil-importing economies in the region, given weak demand in many of
MENAP and CCA’s key trading partners over the medium term. Also, countries
should avoid entering into irreversible spending commitments, given the
uncertainty about the persistence of the shock and the availability of
external financing.
Countries where fiscal sustainability is a concern would be well advised
to save the fiscal windfall gains so as to strengthen buffers against
adverse cyclical shocks, to free resources for growthenhancing spending, and
reduce public debt (especially Egypt, Jordan, Lebanon, and Pakistan). Lower
oil prices also create favorable conditions for continuing subsidy reforms
accompanied by better targeted social safety nets – especially in countries
where subsidies are still high (Egypt, Tunisia) – and for introducing tax
reforms (Lebanon). Where weaknesses in demand growth or potential growth are
also a concern, countries may consider continuing to use a mixed strategy,
allocating a portion of windfall gains toward growth-enhancing investments
in infrastructure, health, and education. Windfall changes in fiscal
revenues should be managed transparently. All countries need to maintain a
focus on fiscal consolidation in the medium term.
External windfall gains should help bolster weak reserve positions across
most of the MENAP region and help them create buffers for responding to
adverse shocks in the future. In countries where inflation is rising (for
example, Tajikistan), monetary policy needs to be tightened further to help
limit exchange rate pressures. By contrast, in some cases, increased
reserves and low inflation could provide an opportunity to increase exchange
rate flexibility (Egypt, Morocco, Pakistan) or reduce policy rates to boost
domestic demand. This is particularly important in countries where growth
has slowed because of conflicts or other shocks.
Lower oil prices also create an opportunity to step up structural reform
efforts, especially in the areas of business environment, governance,
education, and trade integration. Visible progress will help boost
productivity, create more jobs, and improve living standards and
inclusiveness.
|
MENAP Region: Selected Economic Indicators, 2000–16
|
(Percent of GDP, unless otherwise
indicated) |
|
|
Average |
|
|
|
Projections
|
|
2000–11 |
2012 |
2013 |
2014 |
2015 |
2016 |
MENAP 1 |
Real GDP (annual growth) |
5.3 |
4.6 |
2.2 |
2.8 |
3.3 |
3.9 |
Current Account Balance |
9.4 |
12.5 |
10.0 |
6.5 |
-1.7 |
0.3 |
Overall Fiscal Balance |
3.3 |
2.8 |
0.1 |
-2.4 |
-7.0 |
-5.0 |
Inflation, p.a. (annual growth) |
7.2 |
10.1 |
10.0 |
7.0 |
6.5 |
6.4 |
MENAP oil exporters |
Real GDP (annual growth) |
5.6 |
5.4 |
1.9 |
2.7 |
3.0 |
3.7 |
Current Account Balance |
13.6 |
18.2 |
14.7 |
10.0 |
-0.9 |
2.0 |
Overall Fiscal Balance |
7.5 |
7.8 |
4.6 |
0.1 |
-7.1 |
-4.8 |
Inflation, p.a. (annual growth) |
7.3 |
10.5 |
10.4 |
5.9 |
6.1 |
6.2 |
Of Which: Gulf
Cooperation Council |
Real GDP (annual growth) |
5.8 |
5.4 |
3.6 |
3.7 |
3.4 |
3.3 |
Current Account Balance |
16.5 |
24.5 |
20.6 |
16.3 |
1.6 |
4.7 |
Overall Fiscal Balance |
12.2 |
14.6 |
11.3 |
4.6 |
-6.3 |
-4.0 |
Inflation, p.a. (annual growth) |
2.9 |
2.4 |
2.8 |
2.6 |
2.2 |
2.6 |
MENAP oil importers |
Real GDP (annual growth) |
4.7 |
2.9 |
3.0 |
3.0 |
3.9 |
4.5 |
Current Account Balance |
-1.7 |
-5.9 |
-4.8 |
-3.7 |
-3.5 |
-3.9 |
Overall Fiscal Balance |
-5.1 |
-8.4 |
-9.5 |
-8.0 |
-6.9 |
-5.5 |
Inflation, p.a. (annual growth) |
6.9 |
9.4 |
9.2 |
9.5 |
7.4 |
6.7 |
MENA 1 |
Real GDP (annual growth) |
5.4 |
4.6 |
2.1 |
2.6 |
3.2 |
3.8 |
Current Account Balance |
10.3 |
13.6 |
10.8 |
7.1 |
-1.8 |
0.4 |
Overall Fiscal Balance |
4.2 |
4.1 |
1.1 |
-2.2 |
-7.4 |
-5.2 |
Inflation, p.a. (annual growth) |
7.1 |
10.1 |
10.4 |
6.8 |
6.6 |
6.5 |
MENA oil importers |
Real GDP (annual growth) |
4.8 |
2.0 |
2.6 |
2.5 |
3.8 |
4.4 |
Current Account Balance |
-2.2 |
-7.9 |
-6.7 |
-5.0 |
-4.8 |
-5.1 |
Overall Fiscal Balance |
-5.7 |
-8.7 |
-10.5 |
-9.9 |
-8.3 |
-6.4 |
Inflation, p.a. (annual growth) |
6.4 |
8.7 |
10.2 |
10.1 |
8.2 |
7.6 |
Arab countries in
transition (excl. Libya) |
Real GDP (annual growth) |
4.6 |
2.5 |
2.7 |
2.3 |
3.8 |
4.4 |
Current Account Balance |
-0.7 |
-6.1 |
-4.6 |
-3.1 |
-3.6 |
-3.9 |
Overall Fiscal Balance |
-5.9 |
-9.1 |
-11.3 |
-10.7 |
-8.7 |
-6.7 |
Inflation, p.a. (annual growth) |
6.7 |
6.1 |
7.8 |
7.6 |
7.5 |
7.6 |
Sources: National
authorities; and IMF staff calculations and projections.
12011–16 data exclude Syrian Arab Republic.
Notes: Data refer to the fiscal year for the follow
ing countries: Afghanistan (March 21/March 20) until 2011, and
December 21/December 20 thereafter, Iran (March 21/March 20), Qatar
(April/March), and Egypt and Pakistan
MENAP Oil exporters: Algeria, Bahrain, Iran, Iraq, Kuw ait, Libya,
Oman, Qatar, Saudi Arabia, the United Arab Emirates.
MENAP Oil importers: Afghanistan, Djibouti, Egypt, Jordan, Lebanon,
Mauritania, Morocco, Pakistan, Sudan, Syria, and MENA: MENAP
excluding Afghanistan and Pakistan.
Arab countries in transition (excl. Libya): Egypt, Jordan, Morocco,
Tunisia, and Yemen. |
|
CCA Region: Selected Economic Indicators, 2000–16
|
(Percent of GDP, unless otherwise
indicated) |
|
|
Average |
|
|
|
Projections
|
|
2000–11 |
2012 |
2013 |
2014 |
2015 |
2016 |
CCA |
Real GDP (annual growth) |
8.9 |
5.6 |
6.6 |
5.2 |
4.9 |
5.4 |
Current Account Balance |
1.3 |
3.1 |
1.8 |
-0.1 |
-3.3 |
-2.4 |
Overall Fiscal Balance |
2.6 |
4.7 |
2.8 |
1.0 |
-3.9 |
-3.3 |
Inflation, p.a. (annual growth) |
9.7 |
5.3 |
6.0 |
6.0 |
6.4 |
6.8 |
CCA oil and gas
exporters |
Real GDP (annual growth) |
9.3 |
5.6 |
6.8 |
5.2 |
4.9 |
5.5 |
Current Account Balance |
2.7 |
4.6 |
2.8 |
0.9 |
-2.7 |
-1.8 |
Overall Fiscal Balance |
3.4 |
5.5 |
3.4 |
1.4 |
-3.9 |
-3.3 |
Inflation, p.a. (annual growth) |
9.9 |
5.7 |
6.3 |
6.2 |
6.2 |
6.9 |
CCA oil and gas
importers |
Real GDP (annual growth) |
6.5 |
5.4 |
5.6 |
4.7 |
4.4 |
4.7 |
Current Account Balance |
-8.4 |
-10.5 |
-7.6 |
-9.6 |
-8.9 |
-8.0 |
Overall Fiscal Balance |
-3.2 |
-2.2 |
-2.5 |
-2.7 |
-4.0 |
-3.1 |
Inflation, p.a. (annual growth) |
8.2 |
2.1 |
3.6 |
4.7 |
7.9 |
5.7 |
Sources: National
authorities; and IMF staff calculations and projections.
CCA oil and gas exporters: Azerbaijan, Kazakhstan, Turkmenistan, and
Uzbekistan.
CCA oil and gas importers: Armenia, Georgia, the Kyrgyz Republic,
and Tajikistan. |
1 By contrast, in most CCA
oil and gas importers, gas prices are fixed in U.S. dollars on multi-year
contracts.
2 Maghreb countries: Algeria,
Libya, Mauritania, Morocco, and Tunisia.
3 Mashreq countries: Egypt,
Jordan, Lebanon, and Syria.
4The Saudi Arabian authorities
have released revised real GDP data that update the base year from 1999 to
2010. This rebasing has resulted in a higher share of oil GDP (now 43
percent compared to 21 percent previously) and a lower share of non-oil GDP
(57 percent compared to 79 percent previously) in overall GDP. Under the new
series, real GDP growth is now estimated at 10 percent, 5.4 percent, and 2.7
percent in 2011, 2012, and 2013, respectively, compared to 8.6 percent, 5.8
percent, and 4 percent previously. For 2014, the preliminary official
estimate is that the economy grew by 3.6 percent. This compares to staff’s
projection in the October 2014 REO of 4.6 percent growth. If the old (1999
base year) oil and non-oil shares in GDP had been retained, staff estimates
the 2014 growth rate would have been around 4.4 percent.
Source |