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Implications of the Global Turmoil on Economic Outlook for MENA Countries, Afghanistan, and Pakistan Masood Ahmed Director, Middle East and Central Asia Department Dubai, February 2009 Outline The Global Outlook The Outlook for MENAP Oil-exporting countries Emerging markets and developing countries Risks to the Outlook The Global Outlook Global financial system slowly coming back from the brink Bank CDS Spreads High-Grade Spreads (5-years; basis points) (basis points) Interbank Markets (3-month LIBOR minus T-bill rate; in percent) 500.0 900 U.S. 800 400.0 Sovereign EMBI U.S. median 700 600 300.0 500 Euro area U.S. 400 200.0 Europe median Japan 300 Europe 200 100.0 100 1/22 0.0 Jan07 1/22 Jul07 Jan08 Jul08 JanJan07 09 Jul07 Jan08 Jul08 Jan09 1/22 Jan07 Jul07 Jan08 Jul08 Jan09 0 And the spread of the crisis to emerging markets will continue Heat Map of Systemic Asset Classes Emerging markets Corporate credit Prime RMBS Commercial MBS Money markets Financial institutions Mortgage Related ABS Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Three major channels of transmission to emerging markets Declining External Demand and Exports Lower Commodity Prices Tighter Credit (External Financing) Emerging economies’ growth slowed by falling exports and industrial Production... Industrial Production Merchandise Exports (in percent change from a year earlier) (in percent change from a year earlier) 20 Emg. Asia Emg. Asia 60 Emg. Europe 15 40 10 20 5 Latin America Latin America 0 0 -20 Emg. Europe -5 Nov.08 Nov.08 -10 03 04 05 06 07 08 -40 09 03 04 05 06 07 08 09 ...And lower commodity prices Commodity Price Indices (index: Jan. 2002=100) 700 Metal Index Beverage Index 600 Food Index 500 Agricultural Raw Material Energy 400 300 200 100 Proj. 0 Jan-02 Jan-04 Jan-06 Jan-08 And financial pressures Sovereign CDS Spreads Equity Prices (index: 7/1/2007=100) (index: 7/1/2007=100) 3600 120 3200 110 Current account deficit larger than 5% of 2007 GDP 2800 Current account surplus or small deficit 100 2400 90 2000 80 1600 70 Current account surplus or small deficit 1200 Current account deficit larger than 5% of 2007 GDP 60 50 800 40 400 1/22 0 Jul07 Oct07 Jan- Apr08 08 Jul08 Oct08 Jan09 Jul07 Oct07 Jan08 Apr08 Jul08 1/22 Oct08 30 Jan09 Global economy heading for major downturn Real GDP Growth (Annual percent change) 10 10 8 8 6 6 4 4 2 2 0 0 World -2 -4 1970 -2 Emerging and Developing Advanced 1978 1986 1994 2002 -4 2010 All regions affected... Overview of the World Economic Outlook Projections (Year on Year) Projections Difference from Nov. 2008 WEO Projections 2007 2008 2009 2010 2009 2010 5.2 3.4 0.5 3.0 -1.7 -0.8 2.7 1.0 -2.0 1.1 -1.7 -0.5 United States 2.0 1.1 -1.6 1.6 -0.9 0.1 Euro Area 2.6 1.0 -2.0 0.2 -1.5 -0.7 8.3 6.3 3.3 5.0 -1.8 -1.2 World output Advanced Economies Emerging and Developing economies The uncertainty surrounding the outlook is unusually large Downside risks continue to dominate Pernicious feedback loops between real activity and financial markets intensify further. More prolonged and severe process of deleveraging. Current policy efforts not sufficient. Further deterioration in global financial conditions accompanied by sudden stops and disruptive currency depreciation in a number of emerging markets Strong and coordinated policy efforts are needed to rekindle activity at the global level Financial sector: Restore normal functioning of financial markets. Monetary policy: Unlock key credit markets. Fiscal policy: Timely and coordinated implementation of stimulus, use available fiscal space, but keep an eye on long-term sustainability. Economic Outlook for the Middle Eastern Region (MENAP) MENAP Oil Exporters (12) MENAP Developing Economies (10) Syria Tunisia Lebanon Iran Iraq Morocco Afghanistan Jordan Algeria Libya Egypt West Bank Kuwait and Gaza Bahrain Saudi Arabia Qatar United Arab Emirates Oman Mauritania Sudan Yemen Djibouti Somalia Pakistan The slump in global demand has led to a collapse in commodity prices Oil Prices (In U.S. dollars per barrel) 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 2000 0 2002 2004 2006 2008 2010 Lower oil prices hitting MENAP oil exports Total Exports and Fiscal Revenue 1200 Exports - billions of U.S. dollars (left axis) Revenue - percent of GDP (right axis) 45 1000 40 800 600 35 400 200 2000 2002 2004 2006 2008 30 2010 But governments likely to maintain spending 1000 Total Imports and Fiscal Expenditure (In billions of U.S. dollars) 1000 Imports 800 Expenditures 800 600 600 400 400 200 200 0 2000 2002 2004 2006 2008 0 2010 External and fiscal balances to deteriorate Current Account and Fiscal Balances (In percent of GDP) 24 24 18 18 12 12 6 6 0 0 Current account balance Overall fiscal balance -6 2000 2002 2004 2006 2008 -6 2010 Growth in oil producers is expected to slow... Real GDP Growth, Oil-Exporting Countries (Annual percent change) 9 9 8 8 7 7 6 6 5 5 4 4 3 3 World 2 MENAP oil expoters 2 1 GCC 1 0 2000 2002 2004 2006 2008 0 2010 Growth in MENAP oil producers is expected to slow... Real GDP Growth (Annual percent change) 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Non-oil GDP -2 Oil GDP -4 -6 2000 -2 -4 Total real GDP 2002 2004 2006 2008 -6 2010 GCC: Key Economic Indicators Real GDP growth (in percent) Inflation rate (in percent) Oil exports (in billions of US$) Government revenue from oil (in billions of US$) External current account balance (in percent of GDP) Fiscal balance (in percent of GDP) 2007 5.3 6.3 411 314 2008 6.8 10.6 584 460 2009 3.5 6.3 298 257 25.0 27.5 -0.1 17.6 22.8 -3.1 The global slowdown will have a significant impact on growth in MENAP Developing Countries Real GDP Growth (Annual percent change) 7 6 5 4 3 2 World 1 0 2000 MENAP developing countries 2002 2004 2006 2008 2010 Global slowdown is expected to hit export growth... Exports and Remittances 30 (Annual percent change) 30 20 20 10 10 0 0 Exports Worker remittances -10 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ...but the external position is expected to improve External Current Account Balance 2 (In percent of GDP) 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ...while fiscal cushion is absent in most of these countries Overall Fiscal Balance -2 (In percent of GDP) -2 -3 -3 -4 -4 -5 -5 -6 -6 -7 -7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Risks to the Outlook Oil prices do not recover as expected Oil Break Even Prices, 2009 (U.S. dollar per barrel) 90 Fiscal balance Current account balance 2009 WEO oil price projection 80 90 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 ALG BHR IRN IRQ KWT LBY OMN QAT SAU UAE Global growth and investor sentiment weaken further Weaker exports, tourism, and remittances decline Sudden stops or reversal in capital flows Slowdown in Europe impacts North Africa Slowdown in MENAP oil producers impacts the whole region Asset price corrections deepen further Change in Stock Market Indices (Jan 01, 2008 – Jan 23, 2009, in U.S. dollars) -83% -66% -65% -62% -59% -48% -58% -54% -49% -42% -28% -27% -23% -1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 Dubai Pakistan Egypt Saudi Arabia Abu Dhabi Qatar Oman Kuwait S&P 500 Bahrain Jordan Lebanon Morocco Tunisia -0.2 -0.1 2% 0 0.1 Key Policy Messages Oil producers: Maintain fiscal spending Emerging markets: Exploit fiscal space if available Apply some monetary stimulus, if possible Enhance financial supervision and monitoring