Regional Economic Outlook

Middle East, North Africa, Afghanistan, and Pakistan

Middle East and Central Asia Department

International Monetary Fund
May 2009

1
 MENAP Countries
Oil Exporters (12)

Oil Importers (10)

Lebanon
Tunisia
West Bank Jordan Syria
and Gaza Iran Afghanistan
Morocco Iraq

Bahrain
Algeria Qatar Pakistan
Kuwait
Libya
Egypt
Saudi
Arabia
U.A.E.
Mauritania
Oman
Sudan
Yemen

Djibouti Somalia

INTERNATIONAL MONETARY FUND May 2009

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 Outline
 World Economic Outlook

 MENAP Economic Outlook

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World Economic Outlook: Key Messages
 Financial markets remain highly stressed.

 The world economy will contract in 2009 by around 1¼

percent before recovering gradually in 2010.

 Emerging economies face dramatic drops in capital inflows,

demand for their exports, and commodity prices.

 A third wave of the global financial crisis is hitting the world’s

poorest and most vulnerable countries.

 Turning around global growth depends critically on concerted

policy actions to stabilize financial conditions, as well as
sustained strong policy support to bolster demand.

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 Systemic risks remain elevated despite
forceful policy efforts.
CDS Spreads for High-Grade Financials
(Basis points)
600 Lehman Bros.
240
U.S. (left axis)
bankruptcy
Europe (right axis)
500 200
Bear Stearns
collapse
400 160

300 120

200 80
Banks begin
issuing govt.
100 guaranteed 40
Bleak economic debt
releases globally
0 0
Se l-07

D -07

D -08
Fe -07
Ap -07
Ju -07
Ju 07

N -07

Fe -07
Ap -08
Ju -08
Ju 08
Se l-08
N -08

Fe -08
Ap -09
9
r-0
n-

n-
ov

ov
p

p
r

r
n
b

b
ec

ec
Ja

Source: Bloomberg.

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 Equity markets and consumer confidence may be
stabilizing, albeit at very low levels.
Equities Consumer Confidence
(1/1/2007=100; FTSE) (Jan. 2005=100)

120 160
Lehman
110 Brothers 140
100 120
90
100
80
80
70
60
60 U.S. U.S.
50 Japan 40 Japan
Euro area Euro area
40 U.K. 20 U.K.
30 0
7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 9 9 5 5 5 6 6 7 7 7 8 8 9
n -0 b-0 r-0 n-0 l-0 p-0 v-0 c-0 b-0 r-0 n-0 l-0 p-0 v-0 c-0 b-0 r-0 n-0 n-0 v-0 r- 0 p-0 b-0 l-0 c -0 y -0 t - 0 a r- 0
p u p u p p u e a c
Ja Fe A Ju J Se No De Fe A Ju J Se No De Fe A Ja Ju No A Se Fe J D M O M

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 Across the globe, GDP is falling and
unemployment is rising . . .

Real GDP Growth Unemployment Rate 1/

(In percent; quarter on quarter annualized) (In percent)

12 10.5
World
Emerging markets 2/
9.5
8 Industrial countries

8.5
4
7.5
0
6.5

-4 5.5
World
Emerging markets
Industrial countries 4.5
-8
4 4 5 5 6 6 7 7 8 8 4 4 4 5 5 6 6 6 7 7 8 8 9
-0 -0 -0 -0 -0 -0 -0 -0 -0 -0 n-0 n-0 v-0 r-0 p-0 b-0 l-0 c-0 y-0 t-0 r-0 g-0 n-0
n c n c n c n c n c Ju De Ma Oc Ma Au Ja
Ju D
e Ju De Ju De Ju De Ju De Ja Ju No Ap Se Fe
1/ Aggregated using total labor force as weights.
2/ Excludes China, India, Indonesia, Hungary, and Pakistan.

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. . . but the pace of contraction in economic activity is
showing tentative signs of moderating. . .
Industrial Production Merchandise Exports
(Annualized percent change) 1/ (Annualized percent change) 1/

10 60 60

5 55 40

0 50 20

-5 45 0

-10 40 -20

-15 Global IP (left axis)

35 -40
World
-20 Global manufacturing PMI (sa, 30 -60 Emerging markets
50+=expansion; right axis) Advanced economies
-25 25 -80
0 0 1 2 3 4 5 5 6 7 8 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9
n-0 v-0 p-0 l-0 y-0 r-0 n-0 v-0 p-0 l-0 y-0 r-0 -0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-0 n-0
Ja No Se Ju Ma Ma Ja No Se Ju Ma Ma n u u u u u u
Ja J Ja J Ja J Ja J Ja J Ja J Ja J Ja J Ja J Ja
u u u

1/ Three-month moving average. 1/ Three-month moving average.

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. . . and falling demand and commodity prices should
keep inflation in check.
Global Headline Inflation
(Percent change from a year earlier)
10
World
Emerging markets
8 Industrial countries

-2

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 The global economy is set to contract in 2009 . . .
Real GDP Growth
(In percent)

2009 2010

World -1.3 1.9

Advanced Economies -3.8 0.0

United States -2.8 0.0
Euro Area -4.2 -0.4
Japan -6.2 0.8

Emerging and Developing Economies 1.6 4.0

China 6.5 7.5
India 4.5 5.6
Russia -6.0 0.5

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 . . . and to recover only gradually in 2010.

 Recovery in 2010 is predicated on:

 Concerted policy actions to stabilize financial conditions.

 Strong macroeconomic policy support to bolster demand.
 A gradual improvement in credit conditions.
 Cushioning effect from sharply lower oil and commodity
prices.

 Nonetheless, output gaps will continue to widen through 2010,

implying rising unemployment.

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 Risks for the world economic outlook
are to the downside.
 Further delays in implementing policies to stabilize financial
conditions.

 Deflation risks could reinforce a deeper and longer downturn.

 Rising threat of corporate defaults in emerging economies.

 Risks of trade and financial protectionism.

 Sovereign fiscal sustainability concerns.

 But, there is upside potential, hinging on bold implementation

of policies.

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 MENAP Economic Outlook

►Oil exporters

►Oil importers

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 Oil Exporters: Key Messages
 Most oil exporters are maintaining high levels of capital
spending.

 Declining asset prices and slowing economies are putting

some strain on corporate and bank balance sheets.

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 The collapse in oil prices has caused a drop in
exports and government revenue.

Crude Oil Price Exports and Revenue

(APSP, In U.S. dollars per barrel)
140 1,200 44

120
1,000 40
100

80
800 36
60

40
600 32
Exports (In billions of U.S. dollars, left axis)
20
Revenue (In percent of GDP, right axis)

0 400 28
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010

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 Governments are continuing to spend,
and imports remain high.

(In billions of U.S. dollars)

900
Imports
Government expenditure

700

500

300
2005 2006 2007 2008 2009 2010

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External and fiscal balances are deteriorating . . .

(In percent of GDP)

24

18

12

0
Current account balance
Overall fiscal balance
-6
2005 2006 2007 2008 2009 2010

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 … but contributing to global demand.
Imports
(In percent of world imports)

3.5
GCC
Non-GCC
3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010

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 Despite monetary easing, credit to the private
sector has declined.
Interest Rates Private Sector Credit Growth
(In percent) (Percent change)
6 40
MEOE
GCC
5 35

30
4
25
3
20
2 BHR
KWT 15
QAT
1 SAU 10
UAE
0 5
2007 2008 2009 2005 2006 2007 2008 2009 2010

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 Asset values have fallen and . . .

Real Estate Price Index Change in Stock Market Indices

(March 2008=100) (Jan 01, 2008 – Apr 30, 2009, in percent)

130
BHR -40 Kuwait
KWT
OMN -41 S&P 500
120 QAT
SAU -42 Qatar
U.A.E.
-42 Bahrain
110
-44 Oman

-44 Abu Dhabi

100
-48 Saudi Arabia

-73 Dubai
90
Mar-08 Jun-08 Sep-08 Dec-08 -80 -70 -60 -50 -40 -30 -20 -10 0

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. . . some financial sector indicators have worsened.

Credit Default Swap Spreads Corporate Profits

(In basis points; Aug 1, 2008 – Apr 29, 2009) (Q4 2008 over Q4 2007)

700 0
BHR
600 QAT
SAU -50
500 UAE

-100
400

300 -150

200
-200
100

0 -250
Aug-08 Sep-08 Nov-08 Dec-08 Feb-09 Apr-09 KWT UAE QAT BHR OMN

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 Growth has slowed sharply, especially in the oil
sector, but inflation has come down.

Growth and Inflation, 2007-10

(In percent)
GCC Other Total
Proj. Proj. Proj. Proj. Proj. Proj.
2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010

Real GDP growth 5.1 6.4 1.3 4.2 6.8 4.5 3.1 3.4 6.0 5.4 2.3 3.8
1
Oil 1.0 4.5 -4.3 3.5 1.4 0.6 -2.9 -1.0 1.2 2.4 -3.5 1.1
1
Non-oil 6.9 7.2 3.2 3.9 7.6 5.3 4.2 3.8 7.3 6.1 3.7 3.8
Inflation 6.3 10.7 5.3 4.8 13.7 19.9 13.9 11.6 10.3 15.6 10.0 8.5

1/ Excludes Sudan.

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 Risks to the Outlook

 Prolonged global recession

 Further deterioration in balance sheets
of financial institutions
but
 Economic fundamentals remain strong
 Reserves remain large

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 Policy Priorities

 Maintain public expenditure subject to fiscal

sustainability.
 In countries with more limited fiscal space,
prioritize expenditure.
 Keep a close eye on the banking system.
 Press ahead with structural reforms.

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 Oil Importers: Key Messages
 Growth is slowing, and financial sectors are
showing some signs of vulnerability.

 Protected by oil exporters’ continued spending, the

impact on growth has, so far, been moderate.

 But a prolonged recession in partner countries

could have a significant impact on growth, and
unemployment and poverty could rise substantially.

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 In line with lower growth in major trading partners,
foreign inflows are weakening.

Real GDP Growth Foreign Inflows

(In percent) (In billions of U.S. dollars)
8 200
2008 2008
2009 180 2009
6
160
4 140
120
2
100
0 80
60
-2
40
-4 20
0
-6 Exports Remittances Tourism Foreign direct
U.S. Euro Area GCC investment

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 Effective exchange rates have appreciated.
Effective Exchange Rates
(Annual percent change, Jan 2008 - Jan 2009)
30

20

10

-10
Nominal
Real
-20
DJI EGY JOR LBN MRT MAR PAK SYR TUN

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 But current account deficits are projected to
decline somewhat.

Current Account Balance

(In percent of GDP)
0

-10

-20

-30
2008
2009

-40
AFG DJI EGY JOR LBN MRT MAR PAK SYR TUN

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Credit growth to the private sector is decreasing.
Private Sector Credit Growth
(Percent change)
20

15

10

5
2005 2006 2007 2008 2009 2010

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 There is limited fiscal space for
countercyclical spending.
Fiscal Accounts
(In percent of GDP)
-2 30

-3 27

-4 24

-5 21

-6 18
Overall fiscal blance (left axis)
Total revenue (right axis)
Total expenditure (right axis)
-7 15
2005 2006 2007 2008 2009 2010

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 Financial indicators are weakening but,
so far, are manageable.

Change in Stock Market Indices Sovereign Bond Spreads

(Jan 1, 2008 – Apr 30, 2009) (In basis points, Jan 1, 2008 – Apr 30, 2009)
2500
-51 Egypt EMBIG
Pakistan
-47 Pakistan 2000 Egypt
Lebanon
-45 MCSI Emerging Markets 1500

-28 Lebanon
1000
-25 Jordan
500
-14 Morocco
0
Tunisia 30
08 8 8 8 08 8 8 9 9
n- -0 -0 -0 g- -0 -0 b-
0 -0
a r r n ct ec
r
-80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 Ja M Ap Ju Au O D Fe Ap

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 Growth has fallen,
but inflation has also come down.

Real GDP Growth Consumer Price Inflation

(Average; annual changes in percent)
(In percent)

10 35
2008 2008
2009 2009
30
8
25
6 20

4 15

10
2
5

0 0
AFG DJI EGY JOR LBN MRT MAR PAK SYR TUN AFG DJI EGY JOR LBN MRT MAR PAK SYR TUN

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 Unemployment is already high, and economic
slowdown is likely to raise it further.

Unemployment Rate Jobs Needed to Maintain 2008

(In percent) Unemployment Rate
(In millions)
15 2

1.5
10

5
0.5

0 0
EGY JOR MAR PAK TUN EGY JOR MAR PAK TUN

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 Risks to the Outlook

 Prolonged recession in trading partners and

 Reduced availability of external financing
could lead to . . .
 Worse outcomes on growth and employment
 Weaker corporate and bank balance sheets

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 Policy Priorities

 Quickly make use of limited scope for

countercyclical policy.
 Protect vulnerable groups.

 Press ahead with growth-enhancing reforms.

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Thank you

36