Regional Economic Outlook October 2016

Chapter 3: Caucasus and Central Asia: Is the Worst Over?

Fiscal accommodation and exchange rate adjustment have helped the Caucasus and Central Asia (CCA) mitigate the immediate impact from large and persistent external shocks, particularly the slump in commodity prices and weaker growth in key trading partners. Growth is starting to recover, but these shocks have left the region with increased fiscal, external, and financial sector vulnerabilities, along with less policy space and weaker medium-term prospects. Policies should continue to support growth in the near term where policy space is available, while aiming to reduce vulnerabilities over time, including through the formulation of credible multiyear fiscal plans, modernization of monetary policy frameworks, and strengthening of financial supervision. Structural transformation to diversify away from commodities and reduce reliance on remittances is needed to improve medium-term growth prospects, boost job creation, and avoid a deterioration in living standards.

Chapter 4: How Will China’s Rebalancing Affect the Middle East and Central Asia?

Weaker commodity prices, slower global growth, and higher global risk aversion are the channels through which the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and the Caucasus and Central Asia (CCA) economies could be most affected by China’s rebalancing, especially if the rebalancing leads to a hard landing. Overall, the impact on the MENAP and CCA regions is likely to be small—between 0.01 percent and 0.1 percent for each 1 percentage point slowdown in China’s growth—given the limited bilateral trade and financial linkages with China. Within the regions, commodity exporters would be impacted the most. On the positive side, China’s One Belt One Road (OBOR) investments, mainly in infrastructure, could help increase growth in the CCA and Pakistan—even if this investment is less than originally planned. China’s rebalancing also presents an opportunity for the region to increase consumption-oriented exports, for example, tourism, agricultural products, and clothing, while creating jobs. To reap these benefits, however, countries need to step up structural reforms to improve their business environment and boost productivity and competitiveness.

Chapter 5: Financing Fiscal Deficits in Selected MENAP and CCA Oil Exporters

Despite efforts to consolidate, fiscal deficits will remain large in the Gulf Cooperation Council (GCC), the Caucasus and Central Asia (CCA) oil exporters, and Algeria over the medium term. Countries will need robust strategies to finance these deficits, striking a balance between drawing down assets and issuing debt. These financing choices should be underpinned by strong institutional arrangements and clear medium-term fiscal frameworks. In the short term, constraints on domestic financing sources will lead countries to rely heavily on external financing. But the scale of ongoing financing needs provides opportunities and incentives to develop domestic debt markets, which could generate broader economic benefits.

Statistical Appendix