Global Developments: Implications for the Middle East and Central Asia Regions
- International Monetary Fund. Middle East and Central Asia Dept.
- Published Date:
- April 2020
As the coronavirus (COVID-19) pandemic sweeps across the world, growth in the Middle East and Central Asia region is projected to fall from 1.2 percent in 2019 to –2.8 percent in 2020— lower than the growth rates during the 2008 global financial crisis and the 2015 oil price shock (Figure 1)— before rising to 4.0 percent in 2021, as threats from the virus recede and global policy efforts spur recovery. In line with the rest of the world, the regional forecast for 2020 has been significantly revised down from the October 2019 World Economic Outlook (5.7 percentage points lower), mainly reflecting the expected economic fallout from the pandemic that has spread to almost every country in the region, with Iran being one of the major epicenters.
Real GDP Growth
Sources: National authorities; and IMF staff calculations.
Note: EMDE = emerging market and developing economies; and MCD = Middle East and Central Asia region.
Oil prices have fallen by about 50 percent since the COVID-19 outbreak (Figure 2), to the lowest point in more than 20 years after adjustments for inflation, as travel restrictions introduced by governments around the world have reduced demand for oil, and in the absence of a new production agreement among Organization of Petroleum Exporting Countries and other major oil producers (OPEC+). The subsequent production cut agreement by OPEC+ at the start of April, complemented by further production cuts by oil exporting G20 economies, could provide some support to oil prices, particularly if global demand increases.1 Other commodity prices have fallen sharply too on slowing global growth. As Chapter 1 shows, decreases in oil prices are so large that fiscal and export revenues are expected to decline across all oil-exporting countries in the region, including those that might manage to gain market share from higher-cost producers. The lower oil and commodity receipts will erode policy space to address the crisis in some countries, put pressures on exchange rates and government budgets, and weaken external positions.
CBOE Crude Oil Volatility and Real Oil Prices
Source: Bloomberg Finance L.P.
Note: CBOE = Chicago Board Options Exchange; and rhs = right-hand scale. The CBOE Crude Oil Volatility Index measures the market’s expectation of 30-day volatility of crude oil prices.
In addition to the devastating toll on human health, the COVID-19 pandemic is causing significant economic turmoil through simultaneous supply and demand shocks—plunging oil and commodity prices, dropping domestic and external demand, falling consumer confidence, tightening financial conditions, and disruption in production and global supply chains.
At the same time, restrictive containment measures introduced by governments in the region and fear of contagion are weakening the region’s consumer demand, particularly in tourism, hospitality, and retail sectors (Azerbaijan, Bahrain, Georgia, United Arab Emirates). The largest impact is likely to be felt by small- and medium-sized enterprises (SMEs) due to their limited buffers. Moreover, given heavy employment in these service sectors, there could be significant second-round effects on domestic demand across the region if unemployment rises and wages and remittances fall.
The region’s other types of economic activities are being affected through supply-side shocks. With borders in the region being closed and supply chains interrupted, manufacturing production is being disrupted and investment plans put on hold. Moreover, these adverse shocks are being compounded by a plunge in business and consumer confidence, stemming from the region’s elevated social and geopolitical tensions as well as significant uncertainty surrounding the duration and severity of the economic fallout from the pandemic.
Meanwhile, global financial conditions have tightened sharply, adding to the region’s challenges. Equity markets are down by 20–30 percent since their peak in mid-February, with energy sectors being among the hardest hit, and global risk sentiment, measured by the Chicago Board Options Exchange volatility index (VIX), has nearly quadrupled to historic highs over the same period. Despite vigorous monetary policy easing and liquidity operations by major central banks, 10-year government bond yields and sovereign spreads have surged in many countries in the Middle East and Central Asia. High frequency data reveal that nearly $5 billion of portfolio flows had left the region in the month of March. Such a tightening in financial conditions could prove to be a major challenge given the region’s estimated $35 billion in maturing external sovereign debt in 2020.
The outlook for the region is driven by a sizable economic fallout from the COVID-19 pandemic. While higher oil prices—for example from a faster recovery in global oil demand following the recent agreement on production cuts—can improve the region’s outlook and is an upside, risks around the forecast, especially in the near term, are skewed to the downside, and highly dependent on the duration and severity of the pandemic:
- A more severe and protracted COVID-19 pandemic in the region or in its major trading partners could cause a prolonged production disruption, wider supply chain spillover, larger collapse in confidence and demand, and further deterioration in financial conditions. At the same time, banks and nonbank financial institutions, especially those that are not well-capitalized, could come under stress through exposures to the affected sectors and households. All these can lead to a more severe downturn in 2020 and weaker recovery in 2021. Moreover, a mishandling of the outbreak could elevate distrust in local governments, sowing seeds for further social unrest and adding to regional uncertainty.
- A further deterioration of risk sentiment could sharply reduce capital flows to the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, especially portfolio flows— which are highly sensitive to global risk sentiment. For example, if the VIX were to remain at its recent peak in March (at 83) for the rest of the year, portfolio flows to the MENAP region could fall by as much as $100 billion (about 3 percent of GDP) (October 2019 Regional Economic Outlook: Middle East and Central Asia). This decline would exceed total portfolio inflows to the region in 2019. Such a sudden stop in capital flows could stem investment, put pressure on the balance of payments, and cause disorderly exchange rate adjustments, particularly in countries with few buffers and weak fundamentals.
Against this challenging background, the immediate priority for countries in the region is to contain the spread of the virus. Governments across the region have already started taking strong containment measures (Figure 3). For example, almost 80 percent of countries (25) in the region are under either a partial or a complete lockdown. In addition to containment measures, necessary health spending should be undertaken in all countries to ensure health systems are adequately prepared to meet the needs of populations, regardless of the available fiscal space.
MCD Country Measures to Contain Spread of COVID-19
Source: National authorities.
Note: MCD = Middle East and Central Asia region. Informaion presented above is as of April 6, 2020.
As underscored in Chapter 2, these challenges can be especially daunting in the region’s fragile and conflict-affected states (Afghanistan, Iraq, Sudan, Yemen) or those facing large refugee inflows (Iran, Jordan, Lebanon, Pakistan), where the task of preparing their already stressed health systems for the COVID-19 outbreak could be further complicated by supply constraints—including from reduced imports—or high proximity risks and difficulty of social distancing in refugee camps. To help address these challenges, timely external medical and financial support from major economies and international organizations could prove to be necessary. In this context, the IMF has already provided debt relief to Yemen.
In addition, economic policy responses should be directed to prevent the COVID-19 pandemic from causing a protracted economic recession with lasting welfare losses to society through increased unemployment and bankruptcies. Countries are already using a mix of timely and targeted policies on hard-hit sectors and populations (Table 1), for example by providing cash transfers to the unemployed (Kazakhstan), and making concessional financing available to SMEs (Saudi Arabia).2
|Additional Revenue Measures||Additional Expenditure Measures|
In the period ahead, oil exporters facing major demand shocks and sharp declines in oil prices must guard against lasting damage to non-oil sectors. Given fragile growth and generally weak automatic stabilizers, governments may deliver temporary stimulus measures— once the pandemic becomes contained and economic activities are able to return to normal without risking further spread of the virus—to boost aggregate demand where policy space allows.
In other countries, particularly the region’s oil importers where fiscal space is constrained, governments could consider reorienting spending priorities, for example by reducing or delaying non-essential expenditures, or seeking external financing support or aid. The IMF is already providing financial support to Jordan, the Kyrgyz Republic, Pakistan, and Tunisia and debt relief from international creditors to Somalia, giving each country extra policy space to combat the pandemic. Additional financial support is planned for a broader group of countries, and the IMF continues to provide policy support to all its member countries.
Central banks should stand ready to provide liquidity to banks and nonbank financial institutions, particularly those lending to SMEs, while financial market regulators and supervisors could also encourage, on a temporary and time-bound basis, extensions of loan maturities while maintaining a regular assessment of the performance of these loans and the associated financial implications (April 2020 Global Financial Stability Report). As of April 7, seven central banks in the region, including those in Bahrain, Morocco, and the UAE, have injected about $50 billion into their financial systems to support liquidity during the fight against COVID-19.
With weaker external demand and tighter financial conditions, many countries will face challenges on the external front. Countries with a flexible exchange rate and low inflation should allow some exchange rate adjustment to absorb part of the shock. As Chapter 3 points out, tighter monetary policies (and foreign exchange interventions) might be necessary to contain potential capital outflows and the inflationary impact of exchange rate movements, while macroprudential policies and temporary capital flow management could be considered to safeguard financial stability.
Growth projections are based on data as of April 3, 2020 and therefore do not account for the OPEC+ agreement reached on April 9, 2020.
For details, please see the policy tracker on the IMF website: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19.