Transcript

Transcript of the Press Conference on the Middle East and Central Asia 2015 Economic Outlook Update and Low Oil Prices

January 21, 2015

Webcast of the press conference

MS. AMR: Good morning, thank you for attending the press conference on the Middle East and Central Asia Economic Outlook update. I'm pleased to introduce Mr. Masood Ahmed, Director of the Middle East and Central Asia Department. He will make a short presentation and then, we'll take questions from you and online.

MR. AHMED: Thank you very much, Wafa. Good morning to all of you and thank you for joining us this morning. As you know, we are releasing today our regional economic outlook update on the Middle East and Central Asia. This is an ad hoc update that we prepared in light of the steep fall in oil prices. And I wanted to give you a quick overview but then also to take your questions.

I want to make sure you've all received copies of the update and had a chance to look at it before? Everybody's got it? Good, excellent.

So obviously, the world has changed a lot since we released our regional economic outlook in October. You've seen what Olivier Blanchard presented yesterday in terms of the update on the world economic outlook and I want to highlight three teams globally that have impacted the countries in the Middle East and in Central Asia.

First of all and perhaps most obviously, the sharp decline in oil prices which, as you know, have declined by more than half from their peak last summer to a level that we haven't seen except for a short period in 2009 for a long, long time. A combination of supply and demand factors has led to the sharp price decrease and also uncertainty about how long the current trend will last and where prices will eventually settle.

So obviously, the rapidly evolving oil market presents challenges, particularly for the oil exporters in the Middle East and also in the Central Asia and the Caucasus. Second theme is the deepening recession in Russia.

Russia's economy as you were told in the global outlook presentation is now expected to shrink by three percent in 2015 compared to a projection we made last October of growth of half a percent. And this much weaker outlook obviously has a direct and strong impact on its neighboring countries in the Caucasus and Central Asia which are connected to Russia both through trade, through remittances as well as through foreign direct investment.

And the third theme that I want to pick up as backdrop is that the growth projections for a large number of economies, of large economies in the world, have been revised down. As mentioned in the world economic outlook update, the projection for global growth in 2015 has been lowered to three point five percent, only a small increase from last year and about point three percent lower than what we had projected in October. And these revisions largely reflect a reassessment of prospects in China and other emerging markets, the Euro area and Japan. And obviously, this makes for a less favorable external environment for many of our countries particularly the oil importing countries who are exporting to the rest of the world. So this is the international environment.

Now, in addition to these three global trends, there's also one important regional trend that I want to highlight and that is the continuation of conflicts and security related disruptions that have impacted not only some countries directly. And, of course, as we have said before what is happening in Syria, in Iraq, what is happening now in Libya, in Yemen is in the first case a humanitarian tragedy for the people involved. But it also has significant economic and political spillovers for neighboring countries.

In addition to the countries I mentioned, of course, the security situation in Afghanistan and Pakistan also remains challenging. So this is an issue which I wanted to highlight. It's not changed very much in the last three months but it is a backdrop against which we look at our outlook.

So what does all this mean for the economic outlook for the countries in our region? And for that purpose let me divide this up into two groups of countries, the oil exporting countries and then, the oil importing countries.

So let me start with the oil exporters. The oil exporters in the Middle East as well as those in the Caucasus and Central Asia -- come on in. There's a space over here. As well as in the Caucasus and Central Asia are in the first instance, of course, impacted by the decline in oil prices that affects their budgets and their balance of payments.

So just to give you an example, the countries of the Gulf Cooperation Council, the GCC, which are most strongly affected by the oil decline, their export earnings are expected to decline this year by about $300 billion which is about a fifth of their economy compared to the projections that we were making in October. So compared to the projections we were making for their export earnings this year, the new numbers for their export earnings are $300 billion lower than what we were projecting.

Obviously, for other countries as well in the region, the losses for their export earnings are also very significant and there's a table in the document that we've put out which will compare the current account surpluses for the oil exporting countries. And if you look at the difference between 2014 and 2015, you'll see that in many cases these numbers are not just come down quite sharply but in some cases they have turned negative.

So instead of running a surplus, these countries are currently running a current account deficit which is, of course, very unusual for the oil exporting countries in our region. Now, having said that, many of these countries, not all of them, but many of these countries also have large buffers in the form of foreign assets which they have accumulated during the period when oil prices were rising.

So they have been prudent in terms of building up a cushion or reserves that they can now use during this period. And most of them have indicated that they intend, indeed, to draw on some of these reserves to try and maintain at least close to the plans that they had in terms of spending for this year. So our current expectation is that while there will indeed be some reduction in terms of government spending this year compared to what they were planning, this will be done in a measured way. And as a result, the impact of the lower oil price on overall economic activity and growth in these countries is going to be much smaller than the impact on their budgets or on their balance of payments.

So they absorb the impact on their budgets and their balance of payments by using the reserves that they have built up and this will then mitigate the effect on growth. And, in fact, in the Middle East and North Africa, we expect the oil exporters to post growth rate this year of about three percent. And three percent is actually slightly higher than the two point seven percent of growth that they had in 2014. So it's a slight improvement in terms of the growth rate but it is still one percentage point lower than what we were projecting for 2015 in October.

So in October we had expected that growth for the oil exporters in the Middle East and North Africa in this year 2015 would be about four percent. In fact, it's going to be about three percent. So you see the effect on growth is there but it's more limited because of their ability to draw down the reserves they have built up.

Now, turn to the CCA oil exporters and for them they are hit by a twin shock. First of all, price of oil has gone down. This is actually not as important for them in some cases because oil isn't as big a share of their economy but it is a negative shock. At the same time, they have been affected by the spillovers from Russia.

So the consequences for these countries will also be mitigated by the fact that they have reserves that they will use to try and offset the impact of these shocks. Nevertheless, growth for these economies will be around five percent this year which is, again, about one percentage point lower than what we had been projecting in October. So again, for them as for the Middle East countries, the growth rates this year lower than we were projecting by about one percentage point but still quite healthy grow rates.

So what about going beyond next year? Looking at the medium term, what does this lower price of oil mean for them? And what we see is that a number of countries are starting from a different position. So some have more reserves that they can draw down, that gives them more time to adjust. Some are going to be drawing down these reserves quite rapidly over the next year or two which means they have to take action a little bit quicker. But it depends, of course, on how long the new price of oil is going to last and where is it going to settle. And there's a lot of uncertainty about that.

Nevertheless, if oil prices remain lower as the futures markets are now saying for some period of time, it does mean that spending plans will need to be revisited in many of the oil exporting countries. And the spending that is done will have to be scrutinized to ensure that it is prioritized to meet economic and social development objectives.

One specific issue in this regard, I might mention, is energy pricing. As you know, we in the IMF have been saying now for about three years that it's quite important to address the issue of raising energy prices to eliminate generalized subsidies or energy which are inefficient, which encourage excessive energy consumption and which benefit mainly the rich by targeted safety nets that help to protect the poor.

Now, even after the decline in oil prices by half in most of the oil exporting countries in the Middle East and North Africa, energy prices are still below the new oil prices. So there is still a need to raise energy prices and with the new fiscal realities, perhaps more of an urgency to do so and I should say to you that a number of countries have already begun to address this issue and we think that's very encouraging.

And final point I want to make is that beyond looking at the fiscal side, it's also important for many countries in the region to recognize and take advantage of this new framework on oil prices, to push on the diversification agenda. Many of them have already been trying to promote a diversification of their economies and to get the private sector to become more a source of growth. Up to now, some of the private sector growth has itself been driven by government spending and what we think is the next phase is try and find ways to encourage the private sector to become more self-sustaining rather than dependent on government spending.

So that's what I wanted to say about the oil exporting countries. I'll just say a word about the oil importers before I end. And for the oil importing countries in the region, obviously, lower oil prices are good news. Good news in the sense that they provide a breathing space by reducing the import bill that they have to pay to import energy products. And this breathing space also translates in some countries to some relief on the budget because on the budget where they subsidize energy products, the cost of those subsidies now goes down.

Having said that, I should say that even though lower oil prices are good news, some of the other developments in the world economy that I mention, whether it is the slowdown in Russia, whether it is the continued stagnation in the Euro zone, whether it is a fall in the price of some other commodities particularly industrial minerals which are exported by some of the oil importing countries in our region like phosphates, for example, which are exported by a number of countries like Tunisia, like Morocco, like Jordan, or iron ore which is exported by Mauritania. Because these prices have also come down, these factors are weighing as negative even though oil prices coming down is a positive factor.

So the net effect for these countries is that growth projections really are not much changed for the Middle Eastern oil importers than what we were projecting last October. So we're expecting them to grow at about four percent this year, the oil importers in the Middle East and North Africa which is better than last year by about one percentage point. But it's not very different from what we were saying in October.

For the CCA countries, in fact, they're expected to grow at four and a half percent this year which is half a percentage point below what we were projecting in October. Why? Because the impact for them of the slowdown in Russia is more important on their economies than the benefits they get from the reduction in oil price.

And the challenge facing all of the oil importing countries in the region is still the same which is a little bit more breathing space but now they need to persevere with the efforts to try and create more jobs because ultimately, as you'll remember from previous conversations we've had jobs is the key to finding a sustainable growth model for many of the countries in the region.

So let me stop with that and then, we'll take our question. We'll also ask our colleagues outside this room if they could encourage the people who are tapping on the ceiling as part of the reconstruction project of this building to forego their activity for the next half an hour so they don't provide a background.

MS. AMR: We will open the floor for questions now.

QUESTIONER: Good morning. In your speech there is some negative and positive in the lower oil prices. What's your advice for the GCC and for the CCA and GCC countries to minimize the negative impact and maximize the positive impact? Thank you.

MR. AHMED: So let me focus on the GCC and CCA oil exporters as you say. Those are the countries that are most affected. Well, our advice, I think maybe can be divided into different parts. First piece of advice is that in the near term, since many of these countries have built up their buffers, the financial assets, to use during a rainy day, this is the time to use those assets and not to react in a knee jerk way by disrupting economic activity and cutting back their spending too dramatically.

So that's something which they are doing and they have said that they will try to do counter-cyclical spending and we think that's a good idea and we encourage it. So that's the first point.

Second piece of advice is that while you need to do this gradually, you do need now to look at your spending plans for the medium term. Because even before the oil price had come down, in a number of countries in the GCC and some of the countries of the CCA, as well as some of the oil exporters in the Middle East outside the GCC, the spending plans were not consistent with the intergenerational equity in terms of making sure that you did not spend so much that you did not leave enough for future generations.

And so, we were already saying to some countries you need to start moderating the rate of growth of public spending. And that becomes even more important now.

The third piece of advice is that this is the moment to then accelerate the efforts that would help to make sure that the diversification of the economy so that it becomes less dependent on oil and that there's a private sector that is self-sustaining become more -- give fruit more quickly? And in the GCC countries for example, they've already taken a lot of action to improve the business environment, if you look at their ratings on indices like the doing business indicators or the competitiveness reports, they have improved a lot. Outside the GCC actually, many oil exporters are not at that point yet, so they can already do some. But in both GCC and outside the GCC, there is more that can be done to change the incentives for both companies to go into the production of goods that don't depend on the government as their only buyer and also for individuals to start looking for jobs in the private sector rather than in the public sector.

QUESTIONER: A follow-up if you don't mind.

MR. AHMED: Please.

QUESTIONER: What are they telling you? Obviously recently you were talking to them.

MR. AHMED: Yes.

QUESTIONER: Do they listen?

MR. AHMED: It's a very good question but I will say in this case, if you look at what they are doing, it is exactly along these three lines, so the first thing is that most of the countries in the region who have their buffers, have said that they will try to only gradually reduce their spending. That's the first point that I made. Secondly, they are in fact saying that over the medium term, they will try to have a spending plan that is more consistent. Now, medium term of course has to unfold, and the third thing is that even before this happened, the oil price decreased. Many of them have been making a lot of efforts to diversify their economy. I think what this does now is give added urgency to try and address those efforts.

QUESTIONER: One more question if you don't mind. Looking at the economies of the area, exporters and importers, do you have in mind a price for a barrel that can be good for both?

MR. AHMED: Well, I think if you look at the price for oil, what you see is that for different exporting countries, what I would call a break-even price, which is the price at which their budget breaks even, varies. For some, like Kuwait, it is still making a budget surplus today. Qatar comes a little bit higher than that, but in the table that we have in the report, you'll see that most of the countries in the Middle East actually have a break-even price that is higher than the current price, and for some, the price is not just higher than the current price, it was higher than even the price of oil that was prevailing six months ago. So one issue for this is that countries have to look at their spending plan. That's the reason why we were having this discussion about spending plan. Countries have to look at their spending plans to try and align them more with a medium term price of oil that they believe the markets are going to sustain. And so, that's on their side. On the side of the importers, obviously a lower oil price helps them in the short term, because it gives them the breathing space we talked about. But as we saw, most dramatically in the case of the countries of the CCA, but the same issue in a different way, and I'll tell you how, also affects some of the oil importers off the Middle East. If the price of oil is low, because the world economy is slow, so the demand is lower, or if the lower price of oil has an impact on oil exporters with whom they trade or on whom they depend for remittances or investment, as for example, CCA with Russia, as for example Middle East economies with GGC. Then some of the benefits of the lower oil price are offset by the slowing down of their exports, or by the reduced investments that come to them. So the work that has been done by many people, including some of my colleagues in the IMF, or (inaudible), showed that some of the first round benefits of lower oil price are offset by these other factors, and that's one of the reasons why you see that if you look at the oil importing countries in the CCA, you have what appears to be a little bit of a contradiction that they gain from lower oil prices and yet their projections are lower than what we are projecting. That's because of these other factors.

MS. AMR: We'll take a question or two questions online. One question is from B&E. What should oil exporting countries in the CCA do to maintain growth despite low oil prices?

MR. AHMED: Well I think for the CCA countries, we covered a little bit that point earlier, and let me just repeat that to say that the CCA countries, the first thing that they can do to sustain growth in the short term, is to use the buffers that they have built up to try and ensure that the reduction in the price of oil does not have an immediate disruptive effect on government spending, so they can try to offset through counter cyclical spending. Second thing that they can do however, which is more of a medium term objective for them, is to ensure that they encourage the diversification of their economies by improving the business environment for the private sector to operate in those economies. In many of the oil exporting countries in our region, including the ones in the CCA, the degree of private sector involvement and activity outside of the oil sector is still relatively small and part of the reason for that is because the business environment and the conditions under which they operate are not yet at a level that allow them to realize their full potential.

MS. AMR: We'll take another question online from Ian Talley, Wall Street Journal. How long can the GCC buffers practically last before oil's fall starts hitting the real economy much harder?

MR. AHMED: Well the GCC countries, most of the GCC countries have strong and sizeable buffers, so if you look at their projections, going out for the next four, five years, you find that for most of them, they are able to finance substantial budget deficits if those are necessary for that period. So that says they have the capacity to do so. Now the second question becomes, will they want to do so? Will they want to use buffers, not just in the short term to try and deal with the shift in oil prices, so there is no disruption, but will they want to continue to run large deficits for many years? And I think that's where the discussion we had earlier about looking at their spending plans for the medium term, to adjust them in light of new realities in oil prices becomes relevant. And the final point I would say is that of course we have to recognize in all our conversation that there is a lot of uncertainty about where oil prices will settle in the medium term. So we have the futures market which is telling us that oil prices today are at around 50, but over the next five years, they work their way back up to over 70. So that's one source of information, but as we know, even the futures market is only one source of information and so part of the question will be to build buffers. What we do know is that while we can't be sure of where oil prices will settle, we know that they are volatile, and we know that they can go up and down, and that's why the policy of these countries, of the GCC, to build buffers when oil prices were high, has turned out to be a very prudent and wise approach.

Questioner: Do you have any concern with what we see in Yemen about this security crisis and conflicts between the houses and the government? Do you expect any impact of this political crisis on the oil prices, especially Yemen is in a location with the Red Sea and Lebanon? Thank you.

MR. AHMED: Well we are worried about the continued difficulties in Yemen, really because Yemen is already a country with a fragile economic recovery, with a large number of people living in poverty, and with already trying to cope with different shocks that the economy has undergone, and so this makes the uncertainty, makes it both harder to deal with those shocks and also it affects confidence, so that some of the private sector activity is affected. Of course we as an interactive institution don't have a view on the political developments in any country, but we can look at the economic consequences, which is what I was referring to. In terms of the implications for this on the price of oil, you know the price of oil, the markets build in both up side and down side risks into that price. So there's a risk of supply disruptions. That is one of the sources that can push up oil prices with the risk premium, not just from Yemen but also people have been concerned about supply disruptions in other oil producing countries, but there's also the risk that the world economy may turn out to be slower in terms of growth or there's a risk that in fact oil production may turn out to be higher in some countries than expected. If you remember, earlier on in 2014, people were expecting oil production in Libya to be relatively low for the year. As it happened, oil production actually increased at one point to 900, 1000 barrels a day and so that was unexpected. And some people say that was one of the reasons that was helping people to reestablish equilibrium in terms of their expectations. So I think that the market is always looking at both up side and down side risks and prices.

MS. AMR: We'll take two more questions online. Both are on the UAE. The first question is from Abeer Abu Shamalla from al-Khaleej newspaper. To what extent can the UAE economy withstand the impacts of oil price plunge in terms of price and time? The other question from Adam Zaid from the National -- is there a specific vision of the UAE's 2015 growth projection?

MR. AHMED: So the first question is a little bit of a country specific version of the general question that was raised about how long can these countries afford to run deficits, we were talking about earlier. So if you look at the UAE, on our current oil price assumption, for 2015, which is 57 dollars for the composite price that we use, the UAE will run a fiscal deficit this year of around three and a half percent of GDP. And with continued gradual fiscal adjustment and the expected recovery in oil prices in line with futures markets that I was mentioning earlier, we project that the UAE could begin posting budget surpluses again from 2017. So 2015 and 2016 is likely to run a deficit and after that it could start running a surplus. Now, I should also say that the UAE has large buffers in the form of foreign assets which imply that financing of these deficits is not going to be an issue for them.

MS. AMR: The last two questions we'll take also from online are on Jordan. A question from Yousef Damrah, Al-Ghad newspaper from Jordan. What is your forecast for Jordan's GDP growth in 2015? How much has it dropped from the figure included in the world economic outlook issued in October 2014?

MR. AHMED: Right. Before we do that, I didn't answer the second question.

What exactly, specifically did we do in terms of revising our projection on UAE? And I just want to say that our current projections on UAE for this year, 2015, are at three and a half percent overall, and it will be three and a half percent also for next year, and that number may be useful because some people are interested in this. I know in the UAE, is to break this up between Abu Dhabi and Dubai because in terms of breaking that up, the number for Dubai for this year is four and a half percent, 4.5, and for next year it's also 4.6, which is roughly the same number as last year and the year before, so the number for Dubai does not change very much. The number for Abu Dhabi, for this year, is three percent and for next year, is also about three percent. But it's important to say that the reason why the number for Abu Dhabi is lower than we were projecting is because oil production is lower, so because the demand for oil is lower. If you look at the non-oil part of the economy for Abu Dhabi, which is the part that most directly affects economic activity and employment, that is growing at over five and a half percent this year and next year, so the oil part is lower. That brings down the aggregate number for Abu Dhabi to about three percent but the non-oil part of the economy for Abu Dhabi is growing at over five and a half and as I said, the aggregate number for the two economies together for the UAE as a whole is three and a half percent this year and next year. Now, let me turn to the question on Jordan.

MS. AMR: On Jordan, what is your focus for Jordan's GDP growth in 2015? How much has it dropped from the figure included in the wheel issued in October, 2014?

MR. AHMED: So for Jordan, the growth rate this year, that we are projecting is 3.8 percent for this year, which is a slight downward revision from what we were projecting in October. At that time we were projecting four percent for 2015. Now we're 3.8 and this reflects the fact that in the third quarter of last year, the numbers actually turned out to be the real economy grew more slowly than was expected and that's now factored into the new numbers for this year.

MS. AMR: Okay, one more last question on Jordan from Fayeq Hijazin, Petra News Agency. As long as the oil prices continue to drop, are you going to modify some of the objectives that were set by the SBA, the program, with Jordan?

MR. AHMED: Well, for the benefit of those that haven't been following this, I should say that, what this question refers to is that the IMF has been supporting a Jordanian government led program to restore stability and growth and reduce vulnerabilities in Jordan to help it cope with the impact, both of the crisis next door and the spillovers from that crisis, but also to cope with the effect of, in that case, higher costs for energy that they were paying because of the disruption in the supply of gas for electricity generation from Egypt. So that program has now been underway and this program has built into it, every quarter, we have a discussion that looks at what's happened in the economy and tries to adapt the program to respond to those changes. So for example, in 2013 and 2014, when it turned out that the economic impact of the crisis next door and also of the disruption in gas supply was going to be bigger than had been anticipated, the program was adjusted to reflect the cost of that in terms of the targets that were set. Now you have in the opposite direction, benefit, in terms of lower oil prices. And so the first question that the team that is going to be going there at the end of February and early March, will be discussing with the Jordanian authorities, is how is this likely to affect the budget, the economy and how can we reflect that in our numbers. Perhaps the one point that is interesting is that, in fact as you look at the impact on the budget of lower oil prices; it turns out to be more or less neutral. It's not a big positive impact on the budget. And why is that? Well, on the one hand, there are some savings to the government from transportation and from the cash transfers to the population, which they are only made when oil prices are above a hundred dollars, but on the other side, they lose from some of the revenues that they get by taxing energy products. So the budget is more or less the same, but in terms of the bigger impact, particularly on the savings for the electricity company, we'll certainly look at that and at that time revise whatever is needed in terms of the program.

MS. AMR: Well thank you very much. Thank you Masood.

MR. AHMED: Thank you all very much for coming.

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