The International Monetary Fund (IMF) has downgraded its projections for the Middle East and Central Asia (MCD) region’s growth to –4.7 percent in 2020, 2 percent lower than its projections in April 2020.
This drop is driven by the unusually high level of uncertainty regarding the length of the pandemic and its impact on firm closures and potential renewed volatility in global oil markets that dominate the outlook, according to the Regional Economic Outlook for MENA and Central Asia Update Report issued on Monday.
Countries that are fragile and witness conflicts are expected to see a significant decline in GDP per capita, from $2,900 in 2018/2019 to around $2,000 in 2020, which is a dramatic downturn that will aggravate existing economic and humanitarian challenges and raise already-high poverty levels in the region, according to the report.
Furthermore, output in such countries is projected to shrink by 13 percent, on average, for 2020, up from an average growth of 2.6 percent in 2019.
The MCD region has also been hit hard by the oil shock.
The Organization of Petroleum Exporting Countries and other major oil producers (OPEC+) agreements from March and April (and subsequent expansion), together with a reduction in US shale oil production and the recent improvement in market expectations as economies reopen, succeeded in stabilising oil prices, which have recovered half of the losses since the end of 2019, but remain far below pre-COVID-19 levels, according to the report.
In this regard, the report warned that the larger-than-expected production cuts implied by the OPEC+ agreements alongside lower oil prices will have a negative impact on the region’s exports.
Meanwhile, the dual effect of the COVID-19 crisis and the oil price shock have led to a stronger-than-anticipated impact on the region’s activity in the first half of 2020, while the recovery is projected to be more gradual than previously forecast, in line with a weaker global recovery, according to the report.
The report also revealed that March saw sudden reversals of capital flows from emerging markets generally, with the region experiencing an estimated $6 billion to $8 billion in portfolio outflows.
However, the actual size of outflows could have been larger, as official data is not yet available, according to the report.
Higher-credit rated countries in the region, including Saudi Arabia, Qatar and the UAE, have managed to keep market access, with large placements in international capital markets in recent months, while lower-rated issuers, such as Bahrain and more recently Egypt, have also issued in primary markets, albeit at a higher cost, according to the report.
The report also said that the MCD countries’ sovereign issuances made up the majority of emerging market sovereign issuances since the end of March with more than 60 percent.
Growth in credit to the private sector and deposits up to April remained broadly stable, though the former had been declining since the middle of last year, according to the report.
For the MENA region, the IMF expects it to witness a contraction in annual growth to -5.7 percent in 2020 and to rebound to record 3.4 percent in 2021, while the region’s current account balance is projected to decline to -5.8 percent in 2020.
MENA’s overall fiscal balance is expected to witness a reduction to -10.8 percent in 2020 and to 8.9 percent in 2021, while inflation is expected to reach 8 percent and to increase to 9.1 percent in 2021.
On the other hand, the Arab region’s annual growth is expected to record -5.7 percent in 2020 and 3.5 percent in 2021, and the current account balance is expected to retreat to -6.9 percent in 2020 and to -5.9 in 2021. The overall fiscal balance is projected to drop to -11.1 percent in 2020 and to -9.4 percent in 2021, while the region’s inflation is projected to record 4.5 percent in 2020 and 5.8 percent in 2021.
The report also revealed that the IMF approved nearly $17 billion to MCD countries since the beginning of 2020.
Beyond the pandemic and immediate recovery, the report stressed that the countries of the region should shift toward rebuilding buffers through lowering public debt, raising reserves, and promoting a resilient and equitable economy, as many countries in the region will come out of the crisis with little policy space, large public debts, and rising financing pressures.