IMF predicts worst Mideast downturn in half century

The region will see real gross domestic product fall by 4.7 percent this year, the IMF said. (AFP)
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Updated 13 July 2020

IMF predicts worst Mideast downturn in half century

  • The region will see real gross domestic product fall by 4.7 percent this year
  • Overall growth revision was led by subdued activity among oil exporters

DUBAI: The IMF Monday again sharply lowered its Middle East and North Africa economic forecast, to its lowest level in 50 years, over the “twin shock” of the coronavirus pandemic and low oil prices.
The region’s economy will contract by 5.7 percent this year, and shrink by as much as 13 percent in countries torn by conflict, the Washington-based International Monetary Fund warned.
The economic malaise will see poverty and unemployment rise, stoking social unrest, and send budget deficits and public debt surging, it said.
In its regional economic outlook update, the IMF projected the economies of the Middle East and North Africa to contract by 5.7 percent this year, 2.4 percentage points lower than its April forecast.
The projection is the lowest in over 50 years, according to World Bank data, and comes after the region posted modest growth last year.
The battered energy-based economies of the Gulf Cooperation Council (GCC) states are forecast to shrink by a hefty 7.1 percent, 4.4 percentage points lower than April.
“The region has been facing a crisis like no other — a twin shock that affected the normal functions of their economies during the confinement measures,” Jihad Azour, director of IMF Middle East and Central Asia Department, told AFP.
Mideast countries applied some of the most stringent lockdowns and measures against the coronavirus, halting most economic activities.
Oil prices plunged by about two-thirds in a freefall as the global economy ground down to prevent the spread of the coronavirus. They have partially recovered to around $40 a barrel.
The region’s oil-exporting countries are expected to lose around $270 billion of energy revenues, “which is a big drop,” Azour said.
The IMF said that the region’s hardest-hit countries will be those that are “fragile and in conflict situations,” with their economies forecast to contract by as much as 13 percent.
GDP per capita in those unstable countries is expected to plummet from $2,900 in 2018-2019 to just $2,000 this year.
“This is a dramatic downturn that will aggravate existing economic and humanitarian challenges and raise already high poverty levels,” the report said.
“Social unrest could be rekindled as lockdown measures are lifted.”
Azour warned that job losses, together with worsening poverty and inequality, could create stability challenges for governments in the region.
“(Job losses) will come on top of an already high level of unemployment, especially at youth level,” he said.
The IMF said that large and growing deficits are expected to push public debt levels to 95 percent of GDP among Middle East oil importers by the end of this year.
Debt levels are forecast to grow rapidly in Sudan to 258 percent of GDP, in Lebanon to 183 percent and in Egypt over 90 percent, it said.
The woes of oil-importing nations are also compounded by a sharp drop in remittances from their nationals working overseas, who have been put out of work due to the pandemic, Azour said.
The IMF report also warned that the potential decline in expatriate workers — who account for more than 70 percent of the labor force in some oil-exporting countries — would also dampen their recovery.
Some 25 million expatriates work and live in the six GCC states, forming half of the population of the group which takes in Saudi Arabia and the United Arab Emirates along with Bahrain, Kuwait, Oman and Qatar.
Oxford Economics predicted in May that employment across the GCC could fall by 13 percent this year, with job losses of some 1.7 million in Saudi Arabia and 900,000 in UAE.
Azour said that with so few certainties in the current environment, the situation could be even worse than forecast.
“We are in an odd situation where the level of uncertainty is still high; uncertainty about the capacity to control the pandemic and its expansion, uncertainty about the recovery itself, and also uncertainty about the oil prices,” Azour said.


Gold rush at Turkish bazaar a test of trust for lowly lira

Updated 28 min 14 sec ago

Gold rush at Turkish bazaar a test of trust for lowly lira

  • As precious metal prices soar, Turks rush to buy amid economic uncertainty and a volatile currency

ISTANBUL: Hasan Ayhan followed his wife’s instructions last week and took their savings to buy gold at Istanbul’s Grand Bazaar as Turks scooped up bullion worth $7 billion in a just a fortnight.

With memories of a currency crisis which rocked Turkey’s economy only two years ago fresh in his mind, the retired police officer was among those playing it safe as he queued in the city’s sprawling market, where a screen showed the gold price rise by one Turkish lira ($0.1366) in just 10 minutes.

“I think it is the best investment right now so I converted my dollars to buy gold,” the 57-year-old said. “I might withdraw my lira and buy gold with it too, but I am scared to go to the bank right now because of coronavirus.”

The day after Ayhan bought his gold on Aug. 6, the lira hit a historic low and remains skittish, laying bare concerns that Turkey’s reserves have been badly depleted by market interventions, which are showing signs of fizzling out.

Turks traditionally use gold for savings and there may be 5,000 tons of it “under mattresses,” with more added after the recent buying spree, Mehmet Ali Yildirimturk, deputy head of an Istanbul gold shops association, said.

Although bullion has never been more expensive, vendors at the Grand Bazaar said almost no one was selling their gold jewelry. There are only buyers.

HIGHLIGHTS

  • Currency touched record lows in three volatile weeks.
  • Local holdings of hard currencies at all-time high.
  • All are buyers at Grand Bazaar, despite expensive gold.

“I’ve been chatting with hundreds of people who are thinking about selling their cars or houses to invest in gold,” vendor Gunay Gunes said.

In the last three weeks, as selling gripped the lira, local holdings of hard assets such as dollars and gold jumped $15 billion to a record of nearly $220 billion.

There is no evidence suggesting people are about to pull savings from banks, and this week the lira has hovered around 7.3 versus the dollar, although it remains among the worst emerging-market performers this year.

Demand has eased since Turks withdrew some $2 billion in hard foreign cash from their banks during a March-May period in which a lockdown was imposed and the lira hit its last low. Analysts say that if Ankara cannot boost confidence in the currency, which has fallen almost 20 percent this year, import-heavy Turkey risks inflation and even a balance of payments crisis that will worsen fallout from the coronavirus crisis.

Given foreign investors now have only a small stake in Turkish assets, they say the key for President Recep Tayyip Erdogan’s government is convincing Turks to stop turning to the perceived stability of dollars and gold.

The central bank and treasury did not immediately comment on the dollarization trend or any policy response.

Finance Minister Berat Albayrak, Erdogan’s son-in-law, said on Wednesday the lira’s competitiveness was more important than exchange rate volatility.

The central bank has effectively borrowed on local dollar liquidity to fuel foreign exchange market interventions, which are meant to stabilize the lira.

Through Turkish state banks, which together are “short” foreign exchange by $12 billion, the central bank has sold over $110 billion since last year. In turn, the bank’s gross FX buffer has fallen by nearly half this year to below $47 billion, its lowest in years.

The central bank has said its reserves naturally fluctuate in stressful periods, and the treasury says the bank intervenes at times to stabilize the currency.

But ratings agencies say Ankara should take decisive steps, such as an interest rate hike, to rebuild reserves and restore confidence. Otherwise, rising current account deficits and possible debt defaults could tarnish a solid reputation for meeting foreign obligations.

“Locals don’t want to keep Turkish lira, they’ve been dollarizing and buying gold. Turks have hardly ever done that,” said Shamaila Khan, New York-based head of EM debt strategy at AllianceBernstein, which manages $600 billion. “That is why you need proactive policies because if you get to that stage where locals are unwilling to keep their money in the bank then you’re heading to a balance of payments crisis. That’s when the alarm bells will start ringing.” 

Some banks imposed fees on withdrawals this week, while the central bank has curbed cheap credit channels it opened to ease the coronavirus fallout. Yet while lira deposits now earn more than the 8.25 percent policy rate, their real return is negative with inflation at 11.8 percent.

Traders say such backdoor tightening needs to reach 11.25 percent to stabilize the lira, which has nearly halved in value since early 2018.

Market expectations have risen for a formal rate hike that economists say would reinforce central bank independence, even while it could slow economic recovery.

Politics may stand in the way.Erdogan, whose popularity has dipped this year, holds the view that high rates cause inflation, and sacked the last central bank governor for disobedience.

He said on Monday he hoped market rates would fall further.

But firms such as System Denim, which imports materials and makes clothes for companies like Zara and Diesel, are feeling the pinch from rising costs. Owner Seref Fayat said he converted his 4 percent euro-denominated loans to lira at 10 percent. “No need to take on additional FX risk,” he said. “I pay a higher rate, but at least I can see ahead.”