The International Monetary Fund has cut its growth forecast for the Middle East, North Africa, Afghanistan and Pakistan region to just 1% for this year, down from a figure of 1.5% it was touting as recently as April.
In its latest World Economic Outlook report, published on July 23, the Washington D.C.-based organisation said the lower forecast was largely due to a downward revision to the outlook for Iran, “owing to the crippling effect of tighter U.S. sanctions”.
All this is in line with the gloomier outlook for the region expressed by many economists in recent weeks. Concerns about geopolitical instability and the impact of the recently-agreed extension to the Opec+ agreement to cap crude production are weighing on sentiment.
The latter issue is a particular concern for one of the region’s most important economies: Saudi Arabia.
Riyadh-based bank Jadwa Investment recently cut its growth forecast for the kingdom’s economy for 2019 from 2% to 1.6%, due to weakness in the oil sector. It is expecting the oil sector to expand by just 0.3% this year.
Others are even more pessimistic. Oxford Economics is forecasting growth of just 0.5% for the Saudi economy this year, with the oil sector contracting by 1.8% as a result of the extension to the Opec+ agreement announced in late June.
In a July 5 research note, Oxford Economics senior economists Maya Senussi and Mohamed Bardastani said oil production cuts by Saudi Arabia meant “there is a risk of a second recession in three years”. Other Gulf economies could also be negatively affected, although not to the same extent, they added.
Lower output and subdued oil prices mean the authorities in Riyadh are facing some other difficulties. London-based Capital Economics recently predicted the government might push ahead with cuts to its subsidies program and also increase taxes, in an effort to offset the impact of lower oil revenues.
“If we’re right in expecting oil prices to stay low, the authorities are likely to take steps to rein in the budget deficit. This is most likely to come in the form of fresh subsidy cuts or tax hikes,” said Jason Tuvey, senior emerging markets economist at the firm, in a research note published on July 23.
Lower hydrocarbons revenues are likely to increase pressure for austerity measures in other oil-producing countries in the region. Capital Economics thinks the regional slowdown that was evident at the start of this year has further to run, particularly in the Gulf countries.
It is not all gloom and doom though. Capital Economics says Egypt’s economy is likely to be the best performer in the region over the next few years, helped by falling inflation, lower interest rates and an end to fiscal consolidation policies. Morocco could be another bright spot, helped by rising car production and more supportive fiscal policies.
Turnaround in 2020?
Perhaps optimistically, the IMF has penciled in a sharp increase in growth for the region next year, at 3% overall, saying the oil sector should improve its performance.
For that to happen, though, there will need to be a resolution to the current difficulties facing shipping in the Persian Gulf, where tankers have been intercepted on several occasions by Iranian forces and others have been attacked in the Gulf of Oman. That has led to higher insurance premiums for crude exporters and concerns about the ability of oil to continue flowing freely through the Strait of Hormuz.
Elsewhere around the region, economic fortunes continue to be undermined by war in several countries, including Libya, Syria and Yemen.
Unsurprisingly, the growth forecast for the wider Middle East region is much worse than the global outlook. Notwithstanding trade tensions between the U.S. and China and the threat of damage from the UK’s planned exit from the European Union, the IMF is forecasting 3.2% growth for the world economy this year, rising slightly to 3.5% next year.
However, the organisation warns that risks are “mainly to the downside” and it may yet have to lower its projections. “The projected growth pickup in 2020 is precarious, presuming stabilization in currently stressed emerging market and developing economies and progress toward resolving trade policy differences,” said the IMF in its July 23 outlook.
The strongest growth is expected to come from Asia, where emerging and developing economies are predicted to post growth of 6.2% in 2019-20. The Indian economy is expected to grow by 7% or higher this year and next.