Friday, May 15, 2009

How Fares the Middle East (or West Asia)?

The IMF's Regional Economic Outlook (REO) for the Middle East and North African (MENA) region was published on 10 May.

At least two things stand out.

First, the region’s economic growth will slow down to 2.6 per cent this year from 5.7 per cent in 2008 (according to present indications, it may recover to about 3.6 per cent in 2010, the REO said – but, who knows?)

Second, banks and other financial institutions need to conduct their own “stress tests” to identify the extent to which financial sector risks increase the need to strengthen financial supervision and risk management. Specifically, any stress scenario should factor in that so-called “Islamic banks” are greatly exposed to the ongoing property sector downturn. At least another 40% drop in property prices is to be expected in Dubai. Other areas may not be as badly hit but should be prepared for “considerable drops”.

The region has been affected by lower commodity prices, lower export earnings, less FDI, fewer tourists, slower investment flows, and reduced remittances from abroad. However, prudent financial and economic management can help augment high levels of reserves and government “stimulus” spending.

All of the region’s oil-exporting countries – Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the UAE, and Yemen – are feeling the pinch. Regional economies did benefit from less toxic assets, from good domestic markets, and from conservative regulators who have prevented a move into the sorts of sub-prime products that were highly profitable while the economy was booming, but were exposed to huge risks if the economy fell as it did. However, the high crude oil prices and strong investor interest which led to GDP growth of nearly 6 per cent per year between 2004 and 2008 has disappeared, so growth rates are now forecast to decline to 2.3 percent in 2009.

There are also countries which have even less fiscal space – Iran, Sudan, and Yemen –whose governments will have a tough time prioritising their expenditures. Sphere: Related Content

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