IMF says Gulf outlook is good

Wayne Arnold

• Last Updated: May 13. 2008 12:32AM UAE / May 12. 2008 8:32PM GMT

The International Monetary Fund says high oil prices would likely insulate the region from the global economic downturn. Corbis

DUBAI // The International Monetary Fund has issued an upbeat outlook for economic growth across the Middle East and central Asia, saying that high prices for oil was likely to insulate the region from the broader global economic downturn and keep money flowing into new industries and poorer economies.

The report, released yesterday, paints a relatively positive picture for a vast crescent encompassing 30 countries and more than 600 million people, from impoverished Mauritania through to the booming Gulf and east to Kazakhstan.

With economic growth averaging 6.5 per cent last year, the IMF said the region was enjoying a period of growth not seen since the 1980s.

And unlike the oil boom of the 1970s, growth during the present oil boom was being spread more evenly between oil producers and net oil consumers.

“The region as a whole is doing very well,” said Mohsin Khan, director of the IMF’s Middle East and Central Asia department. “This is a change from the 1970s and 1980s, when oil prices shot up and the oil producers did very well, but the oil consumers really got hit very hard.”

Economists say the region needs growth of between six and seven per cent to produce enough jobs to absorb new entrants to the job market. They point to unemployment, particularly among young men, as a recipe for crime and civil unrest. The IMF’s estimate of 6.5 per cent growth, therefore, could come as good news to political analysts. However, Mr Khan said it would take even faster growth to bring the region’s unemployment down.

The IMF also warned of several significant risks to the region’s rapid development.

While soaring prices for oil are providing ample funds for public and private investment in products and services unrelated to oil, rising inflation has become a major challenge, it said. This was unlikely to abate until policy reforms and infrastructure spending could clear bottlenecks to the distribution of key goods and services.

The IMF said if the global downturn worsened, oil prices could suffer and with them, the region’s growth. Despite most of the region escaping the credit turmoil elsewhere, the new conservatism among global banks and investors could raise the cost of borrowing through the region, putting a brake on growth.

The IMF’s warnings have already been mirrored in financial markets, where the cost of borrowing for emerging markets in the Middle East and North Africa has increased as concerns rise that the worst of the global slowdown has yet to be felt.

“There’s been more of a realisation that the economic slowdown, [which] is being seen in rich countries, is going to have an effect [on] emerging markets,” said Brian Coulton, a sovereign risk analyst at Fitch Ratings in London.

While some economists were worried that record high oil prices would slow efforts within the region to diversify economies away from a dependence on oil, low growth in oil production was paradoxically helping to reduce the relative importance of oil to growth, the report said.

Oil output has been held in check by rising costs of exploration, a shortage of equipment and, more directly, by the will of Opec not to respond to record prices with additional production.

With revenues soaring along with oil prices, governments have been spending more on infrastructure and luring increased investment in property, manufacturing and services. These areas, in turn, are supplying a greater portion of economic growth.

The deluge of petrodollars was also flowing into poorer countries around the region in the form of foreign investment, the report said. In particular, investors from the Gulf were investing in property, ports and other infrastructure projects in the Middle East and North Africa.

In the last boom, Mr Khan said, most earnings were used to buy US Treasuries. But thanks to a wave of reform and privatisations, the emerging markets of North Africa are presenting investors with profitable opportunities.

Remittances from workers overseas in places such as the UAE have become another important source of income for poorer countries.

Swelling oil revenues and foreign investment have combined to lift the region’s foreign reserves to roughly US$1 trillion (Dh3.67tn), the report said, enabling governments across the region to pay down foreign debts and bolster their own financial positions. The IMF said the region’s external debt fell below 30 per cent of gross domestic product last year.

The key challenge for regional policy makers going forward, it said, would be to contain the impact of inflation. Countries that still have large foreign debts and current account deficits, such as Djibouti, Georgia, Jordan and Sudan, were vulnerable to rising oil prices and slowing global growth, it added.

Mr Khan also emphasised the need for education that was more relevant to modern business.

The nascent private sector in places such as Egypt, he said, faced a shortage of skills because of inadequate vocational schools and technical colleges and a university curriculum geared towards producing government bureaucrats.

But even wealthy oil exporters in the Gulf faced their own frustrations, the IMF said.

With their currencies pegged to the US dollar, they have been forced to lower interest rates in line with the US, despite their booming economies. The resulting inflation is exacerbated by government spending, but this is vital to reducing the infrastructure and capacity constraints and diversifying their economies to create new jobs.

“That is the dilemma that the countries in the GCC face,” said Mr Khan. “So what do you do? Slow down development strategy or live with inflation?”

warnold@thenational.ae