IMF upbeat on Mideast, but crucial issues loom on horizon

How to read the latest prognosis from the International Monetary Fund (IMF) on the economic prospects for what it calls MENAP — Middle East, North Africa, Afghanistan and Pakistan?

There was not much discussion of the latter two countries at the event hosted on Tuesday at the Dubai International Financial Center (DIFC) by Jihad Azour, the new IMF director for the region. Not that they do not deserve attention, but the big focus was on the Gulf oil-producers, mainly Saudi Arabia and the UAE, and on Egypt, as the main economic engines for the entire region.

Overall, the outlook is better, as Azour said at the outset. The global context in which the region does business is improving, with a “steady improvement” in world gross domestic product (GDP) growth from 3.1 percent in 2016 to 3.5 percent this year and 3.6 percent next. Steady, but slow.

The emerging markets, in general, are laggards, but China, the increasing focus of MENAP trade, as well as the US and Europe have been all been marked up. Risks to the global outlook come mainly from the US, with higher interest rates and increasing protectionism on the cards.

The crucial factor, as ever and for the foreseeable future, is the oil price. The IMF has been quite cautious here, basing its assumptions on an average $55 per barrel this year and next. The fund is probably right to be conservative, with much uncertainty on international energy markets adding to the cuts in production from some oil producers adding to the volatility.

But even at this level, with the measures taken by many Middle East economies to control budget positions, fiscal and trade positions are expected to strengthen, the IMF said.

 
Diversification and austerity

The big thing here is that the non-oil sectors of the crude producers are beginning — slowly — to show the first fruits of diversification programs. Non-oil growth in the Gulf Cooperation Council (GCC) countries is expected to be at 3 percent this year, helping to compensate to some degree for production cuts.

That is the good news, but it comes with a warning: What the IMF calls “fiscal adjustment” (what many would call “austerity”) needs to continue. Fiscal deficits of 10 percent of GDP are still too high, even though they improved in 2016, but if the current programs are continued it will be possible to hit the IMF target of 1 percent by 2022.

In many cases, that is quite a big “if.” The scrapping of more subsidies, the introduction of a value-added tax (VAT) and wholesale privatization programs are policies fraught with difficulties. But, the IMF implies, there is no alternative.

So in this context, what the IMF had to say about Saudi Arabia’s recent decision to resume benefit payments to government employees is revealing.
“From time to time, you can allow some fine-tuning in a program this big,” Azour said. In effect, he was siding with those who have declined to call the benefits decision a U-turn and backed the Kingdom to stick to its commitments in this regard.

Azour welcomed the privatization program currently being planned, which he said was a vital component of the economic diversification strategy. The subsequent comments of Mohammed Al-Jadaan, the Saudi finance minister that he would stick to reforms in the coming months must have been music to the IMF’s ears. 

There is currently an IMF team in the Kingdom doing a detailed study of the statistics and it looks likely that their report, when it is forthcoming, could result in an upward revision of GDP forecasts for this year and the next, set at a miserly 0.4 percent and 1.3 percent not so long ago.

Moving to the second-biggest GCC economy, the UAE, Azour was again complimentary of the efforts toward non-oil diversification. Again, the recent downgrade in GDP forecast, to 1.5 percent this year, was miserly, and could also be the subject of an upward revision once the IMF team in the UAE completes its mission, again depending on oil price and production levels.

Whatever the overall level of GDP, it looks certain that Dubai will outstrip it. The emirate is on a fast track to Expo 2020, and that deadline implies a higher growth rate than the rest of the UAE, with the IMF penciling in 4 percent.

Dubai debt watchers will be keenly awaiting the IMF’s latest estimate of the emirate’s financial obligations, expected later this month. There are several big maturities due over the next couple of years that have to be met. Debt is still a bigger factor for Dubai than even the oil price.

Egypt is probably the IMF’s biggest concern at the moment in the region. The fund visited Cairo to assess the economic situation before approving a disbursement of the $12 billion loan program agreed last year. It will want to see firm evidence of further structural reform and a commitment to bring down inflation, currently at a 30-year high of 30 percent annually, before it pays out.

It was a good start from the IMF’s new man in the Middle East. But there will be much to ruminate over in the detail that will come out in the next few weeks.