Chapter

A.1. MENAP Oil Exporters: Emerging from the Crisis

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
May 2010
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  • Several MENAP oil exporters implemented sizable fiscal stimulus packages in 2009, which helped cushion the impact on the non-oil sector and on neighboring countries.

  • Continuation of this policy, in tandem with improving external conditions, has led to an incipient recovery in 2009 and has brightened the outlook for 2010, when growth is projected to gather momentum. At slightly more than 4 percent, non-oil GDP growth in the coming years will remain below precrisis levels but will likely be more sustainable over the long run.

  • Clouding this outlook are challenges in banking systems where credit remains sluggish and losses on nonperforming loans are yet to be fully recognized. Exit strategies from accommodative macroeconomic policies—which have proved effective in preventing more severe credit and economic slowdowns—will need to depend on the pace of recovery.

  • Also casting doubt on an otherwise positive outlook—for the United Arab Emirates in particular—is the Dubai World (DW) debt standstill announcement. This event also may have broader implications over time for quasi-sovereign debt and the treatment of implicit government guarantees. However, it has had limited direct impact on other countries so far.

Sources: IMF, Regional Economic Outlook database; and Microsoft Map Land.

Note: The country names and borders on this map do not necessarily reflect the IMF’s official position.

Dealing with the Effects of the Global Financial Crisis

For the MENAP oil exporters, 2009 was a difficult year, as the region confronted two major shocks emanating from the global financial crisis: a sharp decline in oil prices—by 36 percent, on average, relative to 2008—and a tightening of financing conditions, with a major retrenchment in capital inflows combined with pronounced increases in sovereign spreads. In addition, oil production cutbacks in several major producers led oil GDP to contract in real terms by 4.7 percent in 2009 (Figure A.1.1). The aggregate current account surplus, which had increased more than tenfold in six years to US$362 billion in 2008, shrank to US$53 billion in 2009.

To cushion against these shocks, several countries pursued vigorous countercyclical macroeconomic policies. By taking advantage of ample fiscal room—relatively low debt levels and large reserve buffers accumulated during the preceding years—MENAP oil exporters were able to undertake large spending programs concentrated on infrastructure investment. Saudi Arabia implemented the largest stimulus package relative to GDP among G20 countries in 2009. Drawing on savings accumulated in its oil stabilization fund, Algeria continued a sizable public investment program to support non-hydrocarbon activity; total central government expenditure increased by more than 10 percentage points of GDP from 2007 to 2009.

Figure A.1.1Oil Sector Hit by the Global Crisis; Non-Oil Sector Buoyed by Stimulus

(Real GDP growth; percent)

Sources: National authorities; and IMF staff estimates.

On the monetary front, in line with international trends, central banks in many countries reduced reserve requirements and cut interest rates and maintained them at low levels. They also undertook unconventional monetary policies by injecting liquidity or capital into banking systems that had suffered a reduction in funding and weakened balance sheets. While private-sector credit growth slowed considerably in many countries, evidence indicates that countercyclical monetary policy—both conventional and unconventional—was effective in dampening the slowdown (Section A.3).

In some countries, where a relatively high share of oil revenues was already being used to finance government spending, and which faced significant financing constraints, the possibility of countercyclical fiscal policy was precluded. In Iraq, for example, the drop in revenues by ⅓ in nominal terms, led to a compression in government spending, most of which fell on investment. Iran faced a 2.5 percentage-point contraction in revenues and responded with a procyclical fiscal policy, reducing its non-oil deficit by more than 3.7 percentage points of non-oil GDP. Similarly, Sudan—limited by high levels of public debt and lack of access to external financing—reduced its non-oil deficit by more than 6 percentage points of non-oil GDP.

Non-Oil-Sector Growth Holds Up, and External Conditions Improve

The non-oil sector continued to grow in 2009, although at an appreciably lower rate of 3.6 percent relative to the 5.4 percent rate registered in 2008. Countercyclical policy was instrumental in buoying non-oil activity in several countries. In addition to the sizable stimulus provided in Gulf Cooperation Council (GCC) countries, in Algeria non-oil GDP growth accelerated—from 5.9 percent to 9.2 percent between 2008 and 2009—on the strength of the large public investment program. For the region as a whole, the net result of sizable shocks to the oil sector mitigated by countercyclical policy was a deceleration in overall economic activity by almost 2 percentage points, to 1.5 percent growth.

External conditions began to improve during the second half of 2009. First, after bottoming out at US$34 per barrel in late 2008, oil prices recovered steadily and started to gain momentum mid-year, surpassing US$70 per barrel in July 2009 and US$80 per barrel in April 2010. Thus, export receipts began to recover, with positive balance-of-payments effects throughout the region (Figure A.1.2). Total exports of MENAP oil exporters grew by 28 percent between February and December of 2009.

With the recovery in oil prices, external financing conditions also improved, with a resumption of capital flows beginning in the second half of 2009, and major declines in sovereign spreads. Until late November 2009—immediately prior to the DW debt standstill announcement—credit default swap (CDS) spreads fell considerably from their mid-February peaks throughout the GCC, with reductions ranging from 627 basis points (bps) in Dubai to 208 bps in Oman (Figure A.1.3).

For the MENAP oil exporters as a whole, the rebound in capital flows in 2009 was concentrated in new bond issuance—reaching a record level of US$28 billion for the year—about half of which was by sovereigns. On the other hand, bank loans remained subdued (Section A.3).

Figure A.1.2Exports and Imports of Goods

(Billions of U.S. dollars)

Source: IMF, Direction of Trade Statistics.

Figure A.1.3Financing Conditions before and after the Dubai World Crisis

(Credit default swap spreads; basis points; Aug 1, 2008–Apr 19, 2010)

Sources: Bloomberg; Markit.

As a result of the improving external environment, many countries have begun rebuilding their stocks of international reserves (Figure A.1.4). Buildup of reserves relative to their lows since mid-2008 have been particularly large for Saudi Arabia (US$27 billion), Algeria (US$14 billion), and Libya (US$11 billion). For the region as a whole, gross official reserves increased by US$28 billion between July and November 2009.1

The DW debt event in November 2009 created uncertainty in regional markets, interrupting the downward path of CDS spreads and a recovery in domestic stock markets (Box A.1.1). The impact was mostly felt in Dubai, with a jump in CDS spreads by 313 bps in five days and a 27 percent drop in the stock market in two weeks. Although the announcement of Abu Dhabi support in early December calmed markets temporarily, lingering uncertainty regarding the eventual terms of the debt restructuring roiled markets once again.

Box A.1.1The Dubai World Crisis

Starting in mid-2008, tight global financial conditions culminated in the reversal of real estate prices across the GCC. The correction was most pronounced in Dubai, where real estate prices had risen sharply, even relative to a number of global urban centers (Figure 1). Pressures on Dubai’s highly leveraged, quasi-sovereign entities followed, compelling Dubai World (DW)—a holding company owned by the Government of Dubai—to seek a debt standstill in November 2009.

Figure 1Downturn in Dubai Real Estate Compared with Other Markets

(Urban real estate prices; index, 2001 Ql=100)

Sources: Dubai Land Department; Haver Analytics; Ministerio de Viviendas; Case/Shiller; and IMF staff calculations.

The standstill announcement was to affect US$26 billion worth of loans and bonds, including a sukuk issued by Nakheel—a major property subsidiary of DW—in 2009 and maturing on December 14. Equally unanticipated, on that date, the Government of Abu Dhabi extended a loan to the Government of Dubai, which stated that it intended to use these resources to repay in full and on time the Nakheel 09, and cover payments to contractors, working capital, and interest expenses through end-April 2010, conditional on a standstill agreement being reached between DW and its creditors.

The DW event renewed downward pressure on the region’s stock markets, although CDS spreads for the rest of the region have been affected only marginally. Support provided by the Abu Dhabi government and a restructuring proposal announced in late March 2010 have helped calm markets, but uncertainties remain, as the government of Dubai is still developing a strategy to put its corporate sector on a viable path.

The Dubai stock market, after losing close to 30 percent of its mid-November value, has partially recovered, while other regional markets quickly rose to the pre-standstill levels. Similarly, a widening Dubai premium over CDS spreads in the other countries has become visible, reaching a maximum of 548 bps with respect to Saudi Arabia by mid-February. Market comovement between other GCC countries and Dubai, which had generally increased following the Lehman bankruptcy in September 2008, has fallen considerably since the Dubai event (Figure 2).

Figure 2Stock Markets: Correlation Coefficients with Dubai Market

(Aug 31, 2008=100; Jan 1, 2008–Apr 19, 2010)

Source: Bloomberg.

1 San Francisco, Los Angeles, San Diego, Miami, Tampa, Las Vegas, and Phoenix.

Sovereign spreads for non-GCC Middle Eastern countries have exhibited a pronounced and virtually uninterrupted downward trend since peaking in the last quarter of 2008, and the DW event only barely altered this path. Beyond the Middle East, there is no visible effect of the Dubai event so far.

Existing concerns regarding the legal enforceability of sukuk were brought to the fore. However, this market has not yet witnessed a sizable contraction attributable to the event; sukuk issuance in the MENA region had already declined from close to US$10 billion per year in 2006-07 to US$4.6 billion in 2008 and US$3.8 billion in 2009, prior to the DW event. Up until early March 2010, issuance was broadly in line with that of the first quarter of 2009, at US$900 million, all of which was by sovereigns. On the other hand, conventional bond issuance ceased following the event and only resumed in mid-March 2010.

Figure A.1.4External Reserves and Crude Oil Prices

(Billions of U.S. dollars)

Sources: National authorities; and IMF, International Financial Statistics.

In late March 2010, a restructuring proposal was announced, which combined support from the Government of Dubai with full repayment of US$14.2 billion of debt. Markets reacted favorably; the Dubai sovereign CDS spread fell by 54 bps to 369 bps, and stock markets in both Dubai and Abu Dhabi ticked upward. For other GCC countries, the impact of the DW event was considerably smaller and relatively short-lived.

Although the impact of the DW debt event has been largely confined to Dubai, it is leading to a reassessment of the value of implicit government guarantees, and a test of the legal enforceability of Islamic financial instruments. The importance of greater transparency by both the corporate and government sectors has also been brought to the fore. In addition, the event is expected to lead to a reassessment of Dubai’s development model.

While Dubai has achieved an impressive degree of diversification and become a major trading and services entrepôt, vulnerabilities associated with Dubai’s highly leveraged property development has put into question the sustainability of such a model. At the regional level, the impact is likely to remain limited as Dubai’s economy accounts for less than 10 percent of GCC GDP, and intra-GCC trade is less than 10 percent of total GCC trade.

Credit Growth Remains Sluggish

Of concern in many countries is the relative sluggishness of private-sector credit, a potential factor slowing the recovery in the non-oil private sector. Following an extended period of vigorous growth through mid-2008, credit has since slowed dramatically—by almost 30 percentage points on average by end-2009 (Figure A.1.5).

Although initially driven by a loss of funding as deposit growth and access to external borrowing tightened, evidence also indicates that demand for credit has weakened and banks’ willingness to lend has waned, thus constraining credit growth even though funding has begun to recover.

Furthermore, uncertainties surrounding the economic recovery, the default of Saudi family-owned firms, problems in the Kuwaiti financial sector, and the DW debt have all contributed to an increase in risk aversion on the part of banks and borrowers. Finally, a discrete inward shift in credit supply may be the result of a change in banking culture in the region, as name lending is deemphasized (Section A.3).

Figure A.1.5Credit and Deposits1

(PPP GDP weighted for aggregation; year-on-year growth, percent)

Sources: National authorities; and IMF, International Financial Statistics.

1 Excludes Iran, Iraq, and Libya due to data limitations.

Of course, not all countries have been affected by stagnant private-sector credit. In Algeria, credit growth did not decline to a large degree, and continued to grow at close to 20 percent annual rate in late 2009, despite policy measures to curb it. In Sudan, credit accelerated slightly in the first half of 2009 and subsequently settled at a 16 percent growth rate, owing in large part to the continued strength of deposit growth.

Brighter Prospects for Most in 2010 and Beyond

As external conditions improve, the outlook for 2010 points to continued recovery (Figures A.1.6 and A.1.7). The average oil price is expected to rebound by about 30 percent in 2010,2 and foreign direct investment inflows are expected to approach their 2008 levels, at close to US$80 billion. Spurred by the higher price and a recovery in production levels, oil exports are projected to increase by 31 percent, to US$680 billion, well above 2007 levels. Consequently, oil GDP is estimated to grow at 4.3 percent, and the external current account surplus to more than double relative to 2009, to US$140 billion.

Many MENAP oil exporters will expand fiscal spending in 2010. Although fiscal balances are projected to improve—from an overall deficit of 0.8 percent of GDP in 2009, to a 2.8 percent surplus—the non-oil fiscal deficit, as a percentage of non-oil GDP, is projected to rise by 2 percentage points on aggregate. Saudi Arabia is set to follow up the largest fiscal stimulus among G20 countries with another record spending package. Its non-oil deficit is projected to widen further by 6.2 percentage points of non-oil GDP in 2010 for an accumulated expansion of 11.5 percentage points for the two years. In addition to providing continued support for domestic non-oil-sector activity, this stimulus is expected to have positive spillover effects on neighboring MENAP countries via sustained trade and remittance flows.

Figure A.1.6Non-GCC: External and Fiscal Balances

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.

1 Percent of non-oil GDP.

Figure A.1.7GCC: External and Fiscal Balances

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.

1 Percent of non-oil GDP.

However, as in 2009, some countries will not be able to increase fiscal expenditure, despite the partial rebound in oil prices. In Iran, prospects for 2010–11 are also uncertain due to the planned implementation of subsidies and energy-sector reform. In Sudan and Yemen, lack of fiscal room will limit the scope for spending to address key social and conflict-related challenges.

Fiscal expansions are expected to boost non-oil-sector activity, which should accelerate to 4.1 percent in 2010, and then to 4.6 percent in 2011. As a result, overall activity should recover to a growth of 4.3 percent in 2010, and solidify at 4.5 percent in 2011. Although these rates are well below precrisis levels, they are likely to be sustainable in the long run. Fiscal and external current account balances should also continue to improve in 2010–11 on the strength of oil prices stabilizing above US$80 per barrel.3

In countries where private-sector credit has decelerated most markedly, a recovery to normal growth rates will take time. Particularly where a credit boom preceded the current slowdown, historical patterns indicate that a protracted period of subpar credit growth is to be expected. As the macroeconomic environment improves, banks’ funding and demand for credit should begin to recover, but heightened risk aversion may constrain credit growth in the foreseeable future (Section A.3)

Next Steps: Withdrawing Stimulus, Preserving Financial Stability

Fiscal stimulus, instrumental in sustaining non-oil activity in several countries during the 2009 downturn, is projected to continue into 2010, which will aid in solidifying the recovery. Beyond 2010, unwinding of the stimulus would be warranted, particularly in countries with high debt, and to avoid possible crowding-out effects in the medium term as private-sector activity gains momentum. Furthermore, if stimulus is to be effective, the quality of spending and the absorptive capacity of the economy should be assessed.

The pace of recovery in private-sector activity will depend on the availability of financing, both from external and domestic sources. On the external side, there are indications that capital flows—foreign direct investment in particular—are returning to the region. In the aftermath of the DW crisis, it is imperative that greater corporate and public-sector transparency be pursued in order to create an environment conducive to continued capital inflows.

On the domestic side of financing, policymakers will face a delicate balancing act in unwinding official support to the financial sector. Liquidity and capital injections have been effective in cushioning the slowdown in bank credit; their unwinding should begin once a recovery becomes evident. Given fixed exchange-rate regimes, domestic interest rates should begin rising again to preclude inflationary pressures as global interest rates begin to tighten. Although inflation remained subdued throughout most of 2009, it may begin to rebound as domestic demand recovers, commodity prices rise further, and real estate markets tighten (Figure A.1.8).

Similarly, policymakers will have to balance the goal of reactivating credit with the need to strengthen financial regulations and enhance supervision, particularly in countries where there is evidence that excessive risk-taking occurred during the precrisis period. A period of sluggish credit may be desirable to allow for the cleanup of bank balance sheets and to facilitate the modernization of business practices in the region’s banking systems, whereby name lending is de-emphasized in favor of more conventional arm’s-length relationships.

Figure A.1.8Beginnings of Inflationary Pressures?

(Consumer price index, average; year-on-year growth)

Source: National authorities.

Table A.1.1.Selected Economic Indicators: MENAP Oil Exporters
AverageProj.Proj.
2000–05200620072008200920102011
Real GDP Growth5.35.45.64.41.54.34.5
(Annual change; percent)
Algeria4.52.03.02.42.04.64.1
Bahrain6.06.78.16.12.93.54.0
Iran, I.R. of5.55.87.82.31.83.03.2
Iraq6.21.59.54.27.37.9
Kuw ait7.75.12.56.4-2.73.14.8
Libya4.36.77.53.41.85.26.1
Oman3.56.07.712.33.44.74.7
Qatar9.015.013.715.89.018.514.3
Saudi Arabia4.03.22.04.30.13.74.0
Sudan6.411.310.26.84.55.56.0
United Arab Emirates7.78.76.15.1-0.71.33.1
Yemen4.53.23.33.63.97.83.8
Consumer Price Inflation6.06.89.915.57.36.66.5
(Annual change; percent)
Algeria2.32.33.64.95.75.55.2
Bahrain0.72.03.33.52.82.42.0
Iran, I.R. of13.511.918.425.410.38.510.0
Iraq53.230.82.7-2.85.15.0
Kuw ait1.73.15.510.54.74.54.0
Libya-3.31.46.210.42.74.53.5
Oman0.13.45.912.63.53.92.9
Qatar3.511.813.815.0-4.91.03.0
Saudi Arabia-0.12.34.19.95.15.25.0
Sudan7.67.28.014.311.310.09.0
United Arab Emirates3.69.311.611.51.02.23.0
Yemen11.610.87.919.03.79.38.4
Central Government Fiscal Balance5.312.89.713.8-0.82.84.6
(Percent of GDP)
Algeria6.613.54.48.1-8.4-5.3-4.2
Bahrain4.64.73.28.0-7.3-0.82.1
Iran, I.R. of2.00.02.70.0-2.7-0.8-0.5
Ir a q115.59.71.7-22.6-19.1-5.7
Kuw ait27.035.440.227.727.022.023.0
Libya12.631.825.524.610.717.218.4
Oman8.413.811.113.93.07.57.9
Qatar8.89.112.811.512.910.515.2
Saudi Arabia3.821.012.232.6-4.61.96.0
Sudan-0.6-4.3-5.4-1.4-4.7-3.4-4.5
United Arab Emirates26.328.521.520.50.411.313.4
Yemen10.01.2-7.2-4.5-10.2-5.3-5.1
Current Account Balance12.123.419.619.63.47.810.0
(Percent of GDP)
Algeria14.024.722.820.20.32.53.4
Bahrain5.013.815.810.64.15.55.7
Iran, I.R. of5.29.211.97.22.42.31.7
Iraq18.912.715.1-19.4-21.0-5.5
Kuw ait27.849.844.740.825.831.632.6
Libya20.944.640.740.716.924.525.6
Oman9.415.46.29.10.32.43.2
Qatar25.628.330.733.016.425.139.4
Saudi Arabia13.627.824.327.95.59.110.8
Sudan-9.5-15.2-12.5-9.0-12.9-8.4-8.5
United Arab Emirates11.022.19.48.5-3.17.87.6
Yemen5.31.1-7.0-4.6-10.7-3.6-5.6
Sources: National authorities; and IMF staff estimates and projections.

Gross official reserves do not include the assets of sovereign wealth funds (SWFs).

The World Economic Outlook baseline forecast for the average oil price in 2010 is US$80 per barrel, compared with an average price of US$61.78 for 2009.

The World Economic Outlook baseline forecast for the average oil price in 2011 is US$83 per barrel.

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