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Mideast economies will not be spared – IMF report

In its latest forecast for the world economy the IMF (International Monetary Fund) says the Middle East will continue to be impacted hard by falling crude oil prices and semi-frozen credit markets externally.

With world trade forecast to contract by 1.3 percent this year the think tank says the reversal of capital inflows are taking a toll with local property and equity markets having come under intense pressure across the region.

Meanwhile, domestic liquidity conditions have deteriorated, it says, while credit spreads have soared for some firms, financial system strains have emerged in a number of countries, and sovereign wealth funds have suffered losses from investments in global markets.
In the region as a whole, growth is projected to decline from 6 percent in 2008 to 2.5 percent in 2009, before rebounding to 3.5 percent in 2010.

The slowdown in growth is expected to be broadly similar in oil-producing and non-oil-producing countries, even though the forces behind it are quite different.

Among the oil-producing countries, the sharpest slowdown is expected in the UAE, where the exit of external funds (which had entered the country on speculation of a currency revaluation) has contributed to a large contraction in liquidity, a sizable fall in property and equity prices, and substantial pressure in the banking system.

The UAE will also suffer from the contraction in global finance and merger and acquisition activity, says the IMF.

At the other end of the spectrum is Qatar, which is projected to grow by 18 percent in 2009 (up from 16.5 percent in 2008), since its production of natural gas is expected to double this year.

In many countries, high government expenditures are filling the void left by the retrenchment of private sector activity (Kuwait, Libya, Oman, Qatar, Saudi Arabia) and will be essential for growth in the entire region.

Regarding monetary policy, the IMF says central banks across the region have reacted appropriately by providing liquidity, cutting reserve requirements, and lowering interest rates (Egypt, Jordan, Kuwait, Saudi Arabia, UAE).

In this respect, countries with pegged exchange rates (Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syrian Arab Republic, UAE) have benefited from the continued monetary easing in the United States.

In the financial sector, pressures are building to varying degrees across the region, owing to banks’ credit exposure to slumping property and stock markets and tightening external liquidity conditions.

In countries that have been most affected so far, policy responses have been relatively swift, with authorities implementing a myriad of measures to shore up confidence and prevent a systemic banking crisis.

These have included introducing blanket deposit insurance (Kuwait, UAE), providing liquidity, and injecting capital into banks (Qatar, Saudi Arabia, UAE).

However, additional government support in this area may be needed in a number of countries, the IMF concludes.

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