IMF predicts strong recovery for Middle East economies

The Washington-based agency said in its World Economic Outlook that the region has benefitted from the fact that crude oil prices have recovered from levels below $40 a barrel at the beginning of 2009 and are now above $80.

'The strength of the recent economic recovery in the Mena region is largely underpinned by the rebound in oil prices from their trough in 2009, which has boosted receipts for oil exporters in the region,' the report said.

At the same time, 'a sizable and rapid fiscal policy response, especially in oil-exporting economies, has played a substantial role in supporting the nonoil sector in these economies', the report noted. These expansionary policies have also had spillover effects on the region's oil importers—where fiscal expansion was more moderate.

'Robust' expansion for oil importers

The IMF predicts that the region's oil importing economies, which include Egypt and Lebanon, will see 'robust' expansion in 2010 and 2011. These countries managed to weather the global recession relatively well, partly due to relatively limited global financial links.

Egypt's economy is projected to grow at 5.0% this year and 5.2% next year, after posting 4.6% last year, the report said. Net capital inflows into Egypt have turned positive since the second half of 2009, after drawing down reserves to limit the impact on the exchange rate and the real economy.

Lebanon, which saw its debt rise to $51bn, or 156% of GDP by the end of 2009, is forecast to register 8% economic growth in 2010, compared to 9% in 2009. The country's growth rate is expected to drop to 5% in 2011.

Meanwhile, average growth rates among oil exporters in the region, which include the UAE, Saudi Arabia, and Qatar, are projected to be higher over the next two years, compared with 2009. Saudi Arabia is expected to grow at 3.4% in 2010 and 4.5% in 2011, supported by sizable government infrastructure investment, the report said.

Qatar's economy is expected to grow by 16.0% this year and 18.6% in 2011, the most in the region, compared to 8.6% in 2009. Meanwhile, after contracting 2.5% last year, the UAE's economy is projected to grow by 2.4% this year, and expand by 3.2% in 2011.

Economies hinge on oil prices

While the report was largely upbeat about the region's economic future, it also raised a few notes of caution. The report warned that the economies in the region remain exposed to any drop in oil prices and to ongoing economic turbulence in Europe.

While oil prices have rebounded from the lows of 2009, future increases are expected to be 'modest', the report said. "Expansion in demand [for oil] by rapidly growing emerging markets is expected to be offset by stagnant demand from advanced economies. Oil and gas production capacity is set to increase, particularly in Saudi Arabia and Qatar, underpinned by continued expansion of productive capacity," the report noted.

An immediate challenge for policy makers in the Mena region is to revive the financial intermediation process. "In many economies, credit growth has been sluggish in the aftermath of the crisis due to weak balance sheets both in the banking sector and the nonfinancial corporate sector. Prominent corporate defaults in Dubai, Kuwait and Saudi Arabia have contributed to increased uncertainty regarding the health of the corporate sector generally," the report said.

A key medium-term objective for the Mena region is to raise potential growth and create jobs for the rapidly growing population. The Mena region also needs to redirect trade toward today's growth engines, attract foreign direct investment, from these economies and exploit inter-regional trade and FDI. "And, as in all emerging market regions, increased financial sector depth and stability and a track record of macroeconomic stability and policy would increase the prospects for robust, self-sustaining growth,' it added.