Doha: 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, before rising to 4.0 percent in 2021 as threats from the virus recede and global policy efforts spur recovery, IMF revealed yesterday in its updated “Mena Central Asia Economic Outlook“.
The Fund’s 2020 projection for the region shows the growth will be lower than the rates during the 2008 global financial crisis and the 2015 oil price shock. 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.
In the GCC countries, growth is projected to contract by 2.7 percent in 2020. Non-oil activity is expected to be a major drag on the near-term outlook, contracting by 4.3 percent this year, a significant downward revision from the 2.3 percent growth projected by IMF in its October 2019 ‘Regional Economic Outlook for the Middle East and Central Asia.’
The Fund noted that Oil prices have fallen by about 50 percent since the COVID-19 outbreak, 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+).
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 . The largest impact is likely to be felt by small- and medium-sized enterprises (SMEs) due to their limited buffers.
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. 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 $5bn 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 $35bn in maturing external sovereign debt in 2020.
The Fund expects that 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.
The IMF cautioned that 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 Chicago Board Options Exchange (CBOE), the Volatility Index ( 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 $100bn (about 3 percent of GDP). 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.
The IMF wanted the regional Central banks to stand ready to provide liquidity to banks and non-bank 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. As of April 7, the Fund noted seven central banks in the region, , have injected about $50bn into their financial systems to support liquidity during the fight against COVID-19.
