Middle East Faces Lost Decade

Emerging Markets IMF editions, October 2015

The Middle East is heading for a “cycle of sustained economic decline,” according to a senior economist, with a risk of a “lost and difficult decade.”

Simon Williams, chief economist for CEEMEA at HSBC, is negative about his whole region. “We’ve been bearish on our outlook for CEEMEA since the start of the year, and even off that low base we’re having to cut our forecasts,” he said. “We’re struck by the loss of momentum across much of the CEEMEA region, and struck by how broad-based that loss of momentum is.”

But it is the MENA nations where he sees the greatest structural difficulty. “Oil’s at 50, a huge terms of trade shock for the MENA region: it means a 50% drop in oil export receipts and fiscal income,” Williams said. “They are quite resilient and have built up stores of wealth over the last decade that will give them some room for manoeuvre… but make no mistake, you’re beginning to see that weight of loss of oil income impacting on their economies.”

While it is far from unusual to suggest oil exporters will suffer from a low oil price, Williams differs from more bullish commentators who tend to see this as a temporary set-back. “You can see it in the fiscal balances. There are budget deficits of 15, 16, 18%, that can be funded in the near term, but as years progress, begin to eat into their savings stock.”

Williams’s comments come at a time when more and more Gulf states are believed to be drawing from their sovereign wealth vehicles in order to help with their budget shortfalls. The Saudi Arabian Monetary Agency is believed to have withdrawn tens of billions of dollars from global asset managers in order to deal with its widening deficit; its foreign reserves fell by almost $73 billion from the start of the oil price decline to September this year. Abu Dhabi’s sovereign vehicles are also believed to be giving funds to the state.

HSBC said in a report this week: “If gains in oil prices do not come to the rescue, the result will be rising fiscal and current account shortfalls, a build-up in debt and a marked fall in growth. There is a worrying precedent for this – the boom of the 1970s and early 1980s was followed by a decade of bust as oil prices slumped.” It said that without aggressive structural reform, the same thing could happen again.

Nevertheless, as oil economies prepare to make greater use of the debt markets, they are generally seen as resilient and highly-rated issuers. This week Moody’s assigned a provisional rating of (P)A1 to a proposed sovereign sukuk issuance from Oman, in Omani rials. The agency noted “a number of strengths” in Oman: positive real GDP growth, albeit falling to 2-3% a year until 2019; favourable debt metrics; low public sector debt; and a large volume of deposits in the domestic banking system.

But “offsetting this strength to some degree is the likely sharp fall in nominal GDP this year from the collapse in oil prices,” Moody’s analyst Steffen Dyck said. “This will crimp government and private sector incomes.” He added: “Uncertainty exists over the effectiveness of the government’s policy response to challenges posed by lower oil prices to Oman’s government finances, external current account, and growth performance in 2015 as well as over the next three years.” For these reasons, the Omani government has a negative outlook on its rating.

Williams said that while oil exporter problems were expected, it was troubling that net energy importers like South Africa and Turkey were also struggling. HSBC has downgraded its outlook on both countries.