Regional Economic Outlook October 2014 Outline Global Outlook - - PowerPoint PPT Presentation

Middle East and Central Asia Regional Economic Outlook

October 2014

Outline

Global Outlook

MENAP and CCA: Regional Themes MENAP and CCA: Outlook and Risks

World U.S. Euro Area Emerging markets China Russia

2014 3.3 2.2 0.8 4.4 7.4 0.2

Revision from Spring 2014

• 0.3
• 0.6
• 0.3
• 0.5
• 0.2
• 1.1

2015 3.8 3.1 1.4 5.0 7.1 0.5

Revision from Spring 2014 0.0 0.1

• 0.1
• 0.4
• 0.2
• 1.8

An uneven global recovery continues

Source: IMF, World Economic Outlook, October 2014.

Real GDP Growth Projections

(Percent change from a year earlier)

Downside risks have increased since last spring

Lower potential growth and secular stagnation in advanced economies Slower growth in emerging markets Geopolitical risks (Russia-Ukraine, the Middle East) Financial market volatility in response to normalization of monetary policy in advanced economies

4

5

Oil prices have declined considerably, yet risks are high in both directions

Brent Crude Oil Price¹

(U.S. dollars per barrel)

Sources: Bloomberg; and IMF Research Department staff calculations.

1Derived from prices of futures and options on October 15, 2014.

50 60 70 80 90 100 110 120 130 140 150

2013 2014 2015

95% confidence interval 86% confidence interval 68% confidence interval Futures

Fall 2014 WEO Oil Price for 2015: $99 Fall 2014 WEO Oil Price for 2014: $103 2013 2014 2015

Deepening conflicts in the Middle East with substantial regional spillovers

Turkey: 649K [0.8] Iraq: 222K [0.6] Egypt 135K [0.2]

 11 million refugees and internally displaced persons  Sectarian violence and political spillovers  Disruptions to bilateral and transit trade  Setbacks for tourism and investment

6

Syria Iraq

Egypt

Libya

Tunisia Algeria Sudan Iran Turkey Chad Niger Saudi Arabia Kuwait Qatar Jordan Lebanon Bahrain Yemen

Recent developments, outlook, and risks

Algeria Libya Kuwait Qatar Saudi Arabia Iran Bahrain United Arab Emirates Oman Yemen Iraq

MENAP oil exporters

8

GCC growth steady, conflicts push down growth projections for non-GCC

1 2 3 4 5 6 2013 2014 2015 2016

GCC, Fall 2014 Non-GCC, Fall 2014 GCC, Spring 2014 Non-GCC, Spring 2014

Real GDP Growth

(Percent)

2 p.p. revision Sources: National authorities; and IMF staff calculations.

Non-GCC outlook is highly uncertain, contingent

• n oil recovery in Libya and Iraq

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• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2013 2014 2015 2016 Other non-GCC IRN LBY IRQ GCC

Hydrocarbon1 Production

(Change relative to previous year, millions of barrels per day)

Sources: national authorities; and IMF staff calculations.

1 Crude oil, natural gas, natural gas liquids, condensates, refined products, and other hydrocarbons.

20 40 60 80 100 120 140 160 Libya Yemen Bahrain Iran Algeria Iraq Saudi Arabia Oman UAE Kuwait Qatar

317 U.S. dollars per barrel

Lower oil prices are putting pressure on government budgets

1

• 8
• 6
• 4
• 2

2 4 6 8 2012 2013 2014 2015 2016 2017 2018 2019 Baseline Persistent 20% decline in oil price

Sources: National authorities; and IMF staff calculations.

1 Assuming no policy response

Fiscal Balance

(Percent of GDP)

Fall 2014 WEO Oil Price for 2015: $99 Oil Price for 2015: $82

Sources: National authorities; and IMF staff calculations.

Fiscal Breakeven Oil Price, 2014

(U.S. dollars per barrel)

4½ percent

• f GDP

Rising domestic energy consumption is reducing external surpluses

11

5 10 15 20

Current Account Balance

(MENAP oil exporters: percent of GDP)

Surplus to decline by $265 billion in 6 years, between 2012 and 2018

109 28 197 59 20 40 60 80 100 120 140 160 180 200 Middle East World Middle East World Oil Gas

Oil and Gas Demand Growth, 2000-19

(Percent) Sources: National authorities; and IMF staff calculations. Source: International Energy Agency

Sizeable energy subsidies are a key reason behind weakening fiscal and external positions

12

Sources: Staff estimates, OECD, IEA, Deutsche Gesellschaft für Internationale Zusammenarbeit, WEO, and World Bank. Notes: Latest data available (2011). Includes petroleum, electricity, natural gas, and coal subsidies. Impact of lower oil prices calculated on gasoline and diesel only. 2 4 6 8 10 12 14 Iran Iraq Algeria Saudi Arabia Libya Bahrain Kuwait Yemen Oman UAE Qatar

Baseline 20 percent decline in oil price

MENA Oil Exporters: Pre-Tax Energy Subsidies

(Percent of GDP)

Average decline in subsidy bills 1.2 percentage point of GDP

Sustaining private sector growth without government spending increases

13

2 4 6 8 10 5 10 15 20 25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spending growth Non-oil GDP growth (RHS)

Government Spending and Non-Oil GDP Growth

(Percent, three-year moving average)

Sources: National authorities; and IMF staff calculations.

MENAP Oil Exporters: Takeaways

• Robust growth in the GCC, uncertain outlook for non-GCC

countries.

• The recent slide in oil prices has accelerated the weakening of fiscal

and current account positions, leading to the following policy recommendations:

• Use available buffers in the short run.
• Develop credible medium-term fiscal consolidation plans,

which has now become more urgent.

• The current growth model based on expanding government

spending is not sustainable. The private sector needs to drive the economy.

Recent developments, outlook, and risks

Egypt Sudan Morocco Mauritania Tunisia Lebanon Syria Jordan Djibouti Afghanistan Pakistan

MENAP oil importers

Somalia

15

Immediate fiscal pressures are easing, and international reserves are improving

8

16

Reserves

(Months of imports)

Sources: Haver Analytics; and national authorities.

4 5 6 7 8 9 10

Fiscal Deficit (Percent of GDP)

1 2 3 4 5 6 7

Subsidy reforms are expected to save governments 1 percent of GDP on average in 2014 and 2015

17 Sources: National authorities; and IMF staff calculations. ¹Excludes Pakistan.

Change in Expenditure¹

(Percent of GDP)

• 2
• 1

1 2 3 4 Change 2010-13 Change 2013-15

Other Capital Generalized Subsidies Generalized Subsidies Investment Wages Investment

A 20 percent drop in oil prices could improve fiscal balances by up to 1 percent of GDP

18

Sources: National authorities; and IMF staff calculations. Notes: Impact of lower oil prices calculated on gasoline and diesel only.

Change in Fiscal Balance, 2015

(Percent of GDP) Wages

0.0 0.2 0.4 0.6 0.8 1.0 1.2 Jordan Tunisia Egypt Morocco Lebanon Pakistan

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Domestic political risks are stabilizing, and risk premia have declined since last year

Sources: PRS Group; Bloomberg, Markit; National authorities; and IMF staff calculations. ¹Higher rating political risk rating represents less risk.

Political Risk¹

(Index, March 2009=100)

75 80 85 90 95 100 105 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

• 350
• 230
• 110

10 130 TUN MAR LBN PAK EGY 2013 2014

CDS Spreads

(Basis points, since Jan 1, 2013 and Jan 1, 2014) Arab Spring

80 110 140 170 200 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Egypt Morocco Pakistan Other MENAPOI¹

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Exports are starting to recover, albeit unevenly

Exports of Goods

(Index; 3-month moving average, 2009=100)

Sources: Haver Analytics; and national authorities. ¹Afghanistan, Djibouti, Jordan, Lebanon, Mauritania, Sudan, and Tunisia.

Medium-term growth is too weak to substantially reduce unemployment and improve living standards

Sources: World Economic Outlook; national authorities; and IMF staff calculations.

21

Real GDP Growth

(Annual percentage change)

1 2 3 4 5 6 7 8 9 Baseline growth 5% Unemployment declines by 1 pp to 11% (3 mil. new jobs) Per capita GDP rises by $285 (10%) by 2020 Historical rates 6%, Double improvement in jobs and incomes Current rates 3% Stagnation of incomes No job growth Growth reaches 8% Makes a serious dent into unemployment and substantially raises living standards

• 2
• 1

1 2 3 4 5 6 Average 2013-14 Average 2015-16

Exports Imports Consumption Investment Real GDP growth

Downside risks to a pickup in exports and investment remain high

22

Contributions to Real GDP Growth

(Percentage points) Sources: National authorities; and IMF staff calculations.

Room for countercyclical policy is limited, making it difficult to navigate the challenging environment

23

Sources: National authorities; and IMF staff calculations.

Policy Buffers

Public debt Reserves Percent of GDP, 2014 Months of imports, 2014 Egypt 93.8 2.7 Jordan 90.0 6.7 Lebanon 144.9 11.6 Morocco 66.0 4.5 Pakistan 62.5 2.1 Tunisia 50.5 4.0 All data for 2014 above 80% of GDP below 3 m of imports 60% to 80% of GDP 3-5 m of imports 40 to 60% of GDP above 5 m of imports

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Sources: ILO, Key Indicators of the Labor Market; UNDP; and IMF staff calculations.

40 45 50 55 60 65 70 MENAPOE MENAPOI Asia LAC SSA

Employment-to-Population Ratio

(Regional average for corresponding years using available data)

5 10 15 20 25 MENAPOE MENAPOI Asia LAC SSA

2000 2010 2012

Youth Unemployment Rate

(Regional average for corresponding years, percent) 10 20 30 40 50 60

Population Living in Multidimensional Poverty, 2013

(Percent)

Living standards and inclusiveness remain a challenge

25

Closing the shortfall in infrastructure investment of $15b per year can temporarily raise growth by 1½ pp

WEO Infrastructure GAP Estimates

(Percent)

Source: Staff calculations.

• 80
• 60
• 40
• 20

20

MENAOI

Electricity generating capacity Road Telephone line

Public Investment and Infrastructure Needs, 2014-19

(Percent of GDP)

Sources: IMF WEO database, Ianchovichina et al (2013), the MDB Working Group on Infrastructure (2011), and staff estimates.

4 8 12 16

MENAOI

Public capital expenditure Physical infrastructure spending¹ Needs

Wide-ranging structural reforms – rising above the world’s bottom 40th quintile – are critical to avoid “the new mediocre”

26 Sources: World Bank; World Economic Forum; PRS Group; and IMF staff calculations.

Labor Corruption Bureaucracy Infrastructure Trade Education Legal Finance Regulations MENAP Oil Importers

11% 20% 24% 34% 21% 39% 47% 45% 45%

Egypt

1% 20% 24% 34% 6% 16% 35% 47% 33%

Jordan

32% 47% 24% 64% 45% 62% 60% 46% 57%

Lebanon

19% 3% 24% 20% 45% 60% 25% 42% 47%

Mauritania

3% . . 19% 19% 5% 19% 13% 28%

Morocco

18% 20% 24% 62% 50% 39% 48% 45% 50%

Pakistan

7% 20% 24% 18% 21% 29% 47% 45% 25%

Tunisia

11% 47% 24% 49% 20% 48% 50% 45% 45%

Sub-Saharan Africa

51% 20% 19% 15% 33% 27% 33% 30% 35%

Latin America

35% 20% 24% 43% 41% 48% 37% 51% 51%

Emerging Europe

45% 20% 24% 50% 57% 52% 47% 48% 66%

Asia

59% 47% 24% 43% 41% 43% 47% 45% 39%

Advanced Economies

83% 82% 84% 88% 88% 83% 79% 61% 90%

Lowest 20th Percentile 60th-80th Percentile 20th-40th Percentile Top 20th Percentile 40th-60th Percentile

MENAP Oil Importers: Takeaways

• Recovery remains weak and uneven.
• Improving fiscal and external positions still

vulnerable, calling for more fiscal consolidation and sometimes greater exchange rate flexibility.

• Medium-term prospects are too weak to

improve employment, living standards and

• inclusiveness. Deep structural reforms are

imperative.

Caucasus and Central Asia

Oil and gas exporters Oil and gas importers

Georgia Armenia Azerbaijan Uzbekistan Turkmenistan Tajikistan Kyrgyz Republic Kazakhstan

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Growth is slowing due to spillovers from Russia and weaker domestic demand, yet remains robust

2 4 6 8 10 12 2011 2012 2013 2014 2015

Real GDP Growth

(Annual percent change) CCA Oil Exporters CCA Oil Importers Russia

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ARM GEO KGZ TJK AZE KAZ TKM UZB

Close linkages with Russia create downside risks to the outlook

Linkages with Russia

Exports Imports Remittances FDI ARM

3 1 1 1

GEO

3 2 2 3

KGZ

2 1 1 2

TJK

3 1 1 2

AZE

3 3 3 3

KAZ

2 2 3 3

TKM

1 2 3 3

UZB

1 2 3 3

30 <3% of GDP 3-10% of GDP >10% of GDP

• 0.8
• 0.7
• 0.6
• 0.5
• 0.4
• 0.3
• 0.2
• 0.1

0.0 Oil Exporters Oil Importers

Impact of 1 percentage point fall in Russia's GDP growth and investor uncertainty on CCA GDP growth

(percent)

Russia’s slowdown and geopolitical tensions are weighing on the CCA outlook

Egypt 135K [0.2]

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2 4 6 8 10 12 14

Inflation in CCA

(CPI, percent change) CCAOE CCAOI

Despite slowing growth, inflationary pressures are rising because of recent depreciations

ARM GEO KGZ TJK AZE KAZ UZB 0.0 2.0 4.0 6.0 8.0 10.0 12.0

• 4.0

0.0 4.0 8.0 12.0 16.0 Inflation Exchange Rate Change (Positive = Depreciation)

Inflation vs. Nominal Exchange Rate Depreciation

(y-o-y percent change through end-Feb 2014)

32

ARM GEO KGZ TJK AZE KAZ TKM UZB

Fiscal and External positions are weakening

33

• 4
• 2

2 4 6 8 2011 2012 2013 2014 2015

Fiscal Balances

(In percent of GDP) CCA Oil Importers CCA Oil Exporters

• 20
• 15
• 10
• 5

5 10 15

• 20
• 15
• 10
• 5

5 10 15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Current Account Balances

(Percent of GDP) CCA Oil Exporters CCA Oil Importers

Continued low oil prices would increase fiscal risks and have mixed effects on the oil exporters and importers

34

30 40 50 60 70 80 90 100 110 120 30 40 50 60 70 80 90 100 110 120 AZE KAZ TKM 2012 2015

Fiscal breakeven oil prices

(U.S. dollars per barrel)

2015 WEO Oil Price 2012 Avg. Brent Oil Price

• Oct. 15, 2014

Brent Spot

• 1.5
• 1
• 0.5

0.5 1 1.5 CCA Oil Exporters CCA Oil Importers

Effect of a 20 Percent Decline in Oil Prices from the Fall 2014 WEO Baseline, 2015

(Percent of GDP) Real GDP CA Balance Fiscal Balance

Financial risks (old and new) are significant

35 AFG ARM GEO JOR KAZ TJK KGZ TKM UZB AZE CCA BRA IND RUS ZAF BRICS LAC SSA

20 40 60 80 10 20 30 40 50 60 70 80 FX deposits as % of total deposits FX loans as % of total loans

High Dollarization

(Latest year available)

15 20 25 30 35 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Private Sector Credit to GDP vs. Trend

Credit as a percent of GDP Linear trend 5 10 15 20 25 ARM AZE GEO KAZ KGZ TJK UZB

Non-performing Loans (Percent of total loans)

2011 2014 (latest)

Fiscal

• Weakening growth

prospects justify a temporary pause in fiscal consolidation, where financing allows, in the context of credible medium-term plans.

• Countries with low

buffers and financing shortages need to continue growth-friendly fiscal consolidation.

Near-term Policy Priorities

Financial

• Stronger macro-prudential

regulations to discourage unsustainable increases in consumer loans.

• Reduce NPLs & directed

lending through tighter asset classification, provisioning rules and loan eligibility criteria .

• Reduce dollarization

through financial deepening and credible macro frameworks.

Monetary & External

• Tighten monetary policy

(UZB, KGZ), if inflationary pressures persist (KAZ, TJK).

• Accommodative (ARM,

GEO)

• Otherwise, remain neutral

(TKM, AZE), and greater exchange rate flexibility can help buffer against shocks and protect export competitiveness.

36

CCA medium-term growth prospects are weakening

37

• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0

GCC Non-GCC ACTs* Other MENAPOI* CCAOE CCAOI

Productivity Labor Capital

Composition of Recent Non-Oil Potential Growth Slowdown

(Change in contributions from each factor of production, 2008-14 versus 2003-07, percentage points) 1 2 3 4 5 6 7 8 9 2003-07 2008-14 2015-19

Potential GDP Growth

(Percent)

High unemployment and inequality suggest that growth has not been sufficiently inclusive

10 CCA Asia LAC SSA 1990s 2000s 2010-12

Unemployment rate

(Decade averages, percent) 5 10 15 20 25 CCA Asia LAC SSA 1991 2000 2010 2012

Youth unemployment rate

(Percent)

38

0.50 0.60 0.70 0.80 1 2 3 4 5 6 7 8 2010 2011 2012 2013

Growth, inequality, and employment

(y-o-y percent change, unless noted)

Employment growth GDP growth Inequality-adjusted Human Development Index (RHS)

Slowdown in structural reforms does not bode well for raising growth and inclusiveness

1 2 3 4 AZE KAZ TKM UZB ARM GEO KGZ TJK

Reversals or delays in structural reforms

(1 to 4+ scale; higher is better)

2010 2013 CCA Oil Exporters CCA Oil Importers

39

Growth Sustainable

A new economic model is needed

Diverse High Inclusive Growth

40

Bold reforms, particularly in governance and regulation, can improve growth and inclusiveness

41

Structural Reform Priorities

Labor Corruption Bureaucracy Infrastructure Trade Education Legal Finance Regulations CCA Oil Exporters 84% 3% 13% 54% 45% 45% 46% 45% 36% Azerbaijan 77% 3% 3% 51% 47% 38% 42% 43% 34% Kazakhstan 90% 3% 23% 57% 44% 53% 49% 47% 38% CCA Oil Importers 49% 3% 3% 46% 59% 32% 44% 41% 60% Armenia 49% 3% 3% 46% 59% 39% 44% 51% 60% Georgia 71% . . 59% 88% 32% 45% 41% 73% Kyrgyz Republic 37% . . 20% 50% 26% 25% 33% 40% CCA 71% 3% 3% 51% 50% 38% 44% 43% 40% Sub-Saharan Africa 50% 21% 18% 18% 32% 29% 36% 28% 35% Latin America 26% 21% 23% 41% 39% 48% 38% 46% 55% Emerging Europe 49% 34% 40% 53% 61% 53% 50% 50% 66% Developing Asia 53% 48% 23% 37% 42% 43% 46% 41% 37% Advanced Economies 84% 81% 83% 87% 84% 82% 78% 64% 90%

Lowest 20th Percentile 60th-80th Percentile 20th-40th Percentile Top 20th Percentile 40th-60th Percentile Data Unavailable

Stronger macroeconomic policy frameworks are needed to enhance economic resilience

10 20 30 40 50 60 70 80

Fiscal Transparency Index

(Index, latest available data; higher values are better)

42

Monetary Policy Framework Exchange Rate Arrangement

U.S. dollar or Euro anchor, Monetary Target, Other Inflation targeting Conventional peg, Stabilized arrangement, Crawl-like arrangement, Other managed arrangement Angola, AZE, Bangladesh, Belarus, China, Croatia, KAZ, KGZ, TKM, Nigeria, Russia, TJK, UZB, Venezuela ARM, Czech Rep., Dominican Rep. Floating, Free floating Brazil, Chile, GEO, Mexico, Poland, Romania, South Africa, Turkey

Takeaways

• Near-term
• Outlook: Growth is slowing because of negative spillovers from Russia

and weaker domestic demand, and fiscal and external positions are

• weakening. Risks are tilted to the downside.
• Policies: If buffers and financing allow, countries can slow the pace of

fiscal consolidation, while maintaining credible medium-term plans.

• If inflation persists, monetary policy needs to be tightened. Macro-

prudential policies need to be strengthened.

• Medium-term
• Outlook: Potential growth is slowing. Inclusiveness and low diversification

remain an issue. Policy frameworks are not resilient to shocks.

• Policies: Countries need to reinvigorate structural reforms (governance,

bureaucracy, trade) to create an economic model that is sustainable, more inclusive and diverse, supported by modern policy frameworks.

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