The headline economic numbers look rather mundane, with no real cause for alarm. Economic growth for the Middle East and North Africa is pegged at 2.6 per cent this year and a reasonable 3.5 per cent for next, in line with global growth projected by the International Monetary Fund.
But dig a little bit deeper in the IMF’s regional economic outlook and you’ll find that the pain from lower oil prices will continue after a dramatic correction that began more than three years ago. The Gulf states will grow this year, but just barely, having slashed its forecast for growth across the six members of the Gulf Co-operation Council to just a half per cent, down from 0.9 per cent it forecast in May.
The oil exporting states are continuing to adapt to a new normal of crude hovering between $55-$60 a barrel. “It’s important from a policy standpoint to be on the conservative side and to make sure we are not dependent on the oil cycle,” Jihad Azour, director for the Middle East and Central Asia at the IMF told me after a round-table I chaired on the regional outlook.
The good news Azour noted is that these countries are progressively reducing the weight of oil on their economies in the drive to diversify. Gulf countries have overhauled their economic strategies. Saudi Arabia, the region’s biggest economy, 18 months ago launched “Vision 2030”, a blueprint to shift more of the burden growth to the private sector.
But the IMF warned that drastically reducing a double-digit budget deficit too quickly could suffocate the private sector and hamper growth. In fact, the fund has forecast an economic expansion in the Kingdom of just 0.1 per cent this year before recovering to 1.1 per cent next year.
“We’ve seen that move of getting more of a balance of having steady but continual fiscal reforms, but you have to have private sector growth as well,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Fiscal reform is moving towards not just to cutting back expenditure but also raising revenue which is also an important development.”
The government has cut some subsidies (while watering down salary cuts and utility increases), announced new taxes, and lifted a controversial ban on women driving. With a solid credit rating, it went to global bond markets three times in less than a year.
While the IMF projection for the Gulf states raised some eyebrows, there was another figure that stood out for me suggesting that the pain offered by lower oil prices will inflict medium term damage as well.
In its regional report, the IMF calculated growth for the Middle East oil exporting countries including Algeria, Iran, Iraq and Libya and it is not promising. The expectation is the group will grow at an average annual rate of just 2.8 per cent over the next five years, half the pace achieved in 2016, when the oil crisis took hold.
There is however pressure to push ahead. Five energy producers, from Algeria to Saudi Arabia, posted budgets deficits ranging from 13-22 per cent of GDP last year.
“My concern, looking at the experience of traditional countries who have gone through these fast-paced necessary liberalisation, privatisation, opening of markets, is that in the short term there is a downside to growth,” said Alia Moubayed, Direct of Geo-economics and Strategy at the International Institute for Strategic Studies.
When I asked in her in the round-table if this is the new normal, she did not hesitate in suggesting “experience tells us yes”.
The IMF based its projections on an average oil price of $50 a barrel and Brent crude prices are even higher at $60, but there is a hidden danger in the recent rally. There may be pressure by local populations to lift the foot off the pedal in this drive to rebalance government finances.
And there is another inherent challenge that comes with sub-par growth, which is worsening youth unemployment, in a region that has the highest rate in the world at just over 27 per cent according to the International Labor Organization.
The IMF’s Azour told the audience in Dubai that 25 million jobs will need to be created in the next decade to just tread water with that alarming level of joblessness, especially in North Africa.
A young, eager population is a plus for investors in a region that is undertaking overdue reforms, but to deliver job creation the IMF said sustainable annual growth of 6 per cent will be needed. And that through the next five years, in this climate of lower oil prices, is certainly not in the cards despite all the goodwill and painful reforms.
The writer is Emerging Markets Editor at CNNMoney.