The outlook for most economies in the Middle East is distinctly poor in the short term, on the basis of a new and rather pessimistic review of the region by the IMF.
In its latest World Economic Outlook (WEO), published this month, the organisation warns that growth across the Middle East, North Africa, Afghanistan and Pakistan is likely to almost halve this year to 2.6%, compared with 5% in 2016. The key underlying problems include a slowdown in Iran’s economy after very fast growth in 2016 and cuts in oil exports by major oil producers such as Saudi Arabia.
“Prospects for many emerging market and developing economies in sub-Saharan Africa, the Middle East and Latin America are lackluster, with several experiencing stagnant per capita incomes,” the organization says in its report. “Fuel exporters are particularly hard hit by the protracted adjustment to lower commodity revenues.”
Things may pick up next year, the IMF suggests, with growth across the region forecast to rise to 3.5%. However, that assumes both stronger domestic demand in oil-importing countries and a rebound in production by oil exporters. Whether the second of these comes about is open to question, with Saudi oil minister Khalid al-Falih suggesting recently that his country could back a Russian proposal to extend a deal on production cuts until the end of 2018.
Winners And Losers
While the overall picture is underwhelming, some economies are expected to post some remarkably fast growth.
Leading the way is Libya, which the IMF says should grow by 55.1% this year and 31.2% next year as the economy gets back on its feet after years of turmoil. That is, of course, dependent on the political environment not entering another downward spiral, which would cut oil exports and deter any inward investment.
Also doing well is Djibouti, one of the smallest economies in the region, which is expected to continue posting consistently strong growth of 7% a year from 2017 to 2019. Pakistan is ranked third, with growth expected to reach 5.3% in 2017 and 5.6% in 2018, partly as a result of ongoing investment in the China-Pakistan Economic Corridor.
A number of North African countries, including Sudan, Mauritania, Egypt and Morocco, are expected to post growth of between 3.7% and 4.8% this year. In Egypt’s case, that should be helped along by a series of recent reforms including the November 2016 decision to float the Egyptian pound and, since then, moves to cut subsidies and improve investment procedures.
Iran is expected to see a sharp slowdown in its GDP growth figure for this year, dropping from 12.5% in 2016 to 3.5% this year, although it is expected to partly bounce back thereafter, with forecasts of 3.8-4.1% growth from 2018 to 2022.
The biggest issue facing Iran and its economy is the attitude of the US administration of President Donald Trump, which keeps hinting that it might withdraw from the nuclear deal which came into force in January 2016 and which cut sanctions on the country in return for Tehran scaling back its nuclear activities.
Whether or not the US goes down that road, the threat of the carefully-constructed deal collapsing is enough to make many potential investors wary. For now, European and Asian banks and governments continue to offer support for the agreement, which may be enough to save it.
Political Risks
In the rest of the region, the outlook is often tricky. As Maurice Obstfeld, an economic counsellor at the IMF, notes in a foreword to the WEO report, “emerging and low-income commodity exporters, especially energy exporters, continue to struggle, as do several countries experiencing civil or political unrest, mostly in the Middle East, North and sub-Saharan Africa, and Latin America.”
The negative consequences of political unrest can be seen in the likes of Afghanistan and Somalia, whose economies are expected to grow by 2.5% and 2.4% respectively this year. In Yemen, the situation is far worse and the economy is expected to contract by 2% in 2017, following negative growth of 9.8% in 2016 and 28.1% in 2015.
Iraq is also struggling to establish political stability, with the threat of Kurdish secession the latest issue facing the country just as the defeat of Islamic State (aka Daesh or ISIS) nears. The Iraqi economy grew strongly in 2016, posting an 11% upswing, but this year it is expected to contract by 0.4% before returning to growth in 2018.
Among other oil and gas exporters in the region, growth also remains subdued. Qatar and Bahrain are expected to post growth of 2.5% this year, while the UAE economy will expand by just 1.5%. The IMF has cut its projections for growth in the critical economy of Saudi Arabia since its last WEO report in April. It now expects the kingdom’s GDP to rise by a paltry 0.1% this year and 1.1% next year.
Oman is also skirting on the edge of recession, with zero growth projected for this year, followed by a pick-up to 3.7% next year. It’s economy should be helped by the late-September announcement by oil giant BP that the Khazzan gas field is now operational, ahead of schedule.
Algeria is struggling too, with growth rates falling from 3.3% in 2016 to an expected 1.5% this year. That will be matched or beaten by some oil importers in the region. The Lebanese economy is also expected to grow by 1.5% this year, while Jordan’s GDP will expand by 2.3%, as will Tunisia’s.
Bringing up the rear is Kuwait, which is expected to post negative growth for this year of 2.1%, making it the worst performing economy in the region in 2017. The country is grappling both with lower oil prices and a persistent inability to move ahead on major projects which would help to diversify the economy.
The IMF has based its forecasts on an average oil price of $50.28 a barrel this year and $50.17 next year. That is well below the level that most Middle East oil exporters need to balance their budgets, suggesting that governments in the region will have to continue to make cuts to spending or issue more debt to cover the shortfall.
All this comes as the global economy is doing relatively well. The IMF says the upswing in economic activity around the world is strengthening, with global growth projected to rise to 3.6% in 2017 and 3.7% in 2018. It says that improvements in the Eurozone, Japan, parts of Asia and Europe are making up for downward revisions to growth prospects in some major economies such as the US and UK.
