SINGAPORE, 15 September 2006 — The Middle East is expected to grow according to the IMF’s World Economic Outlook, which was released by the IMF yesterday. It was revealed that the Middle East is set to enjoy a steady growth rate of 5.8 percent in 2006 and a growth rate of 5.4 percent in 2007. Of the countries in the region, Saudi Arabia’s economy is set to grow 5.8 percent in 2006 and by 6.5 percent in 2007.
Thanks to high oil prices and increased production, particularly in Kuwait, Saudi Arabia, Libya and the UAE, governments of oil exporting countries can expect to see an increased growth in oil revenues. Higher oil revenues are helping to propel the economies of the oil-exporting nations and this has helped to drive the non-oil sectors and improve external current accounts and fiscal balances. With non-oil sector currently running at eight percent, inflation has begun to pick up but has been well contained through a combination of pegged exchange rates, open product and labor markets and low global inflation.
The report noted that on the whole, the outlook for the region remains favorable. Part of the reason is due to the fact that oil prices are set to remain high. However, high oil prices have been supported by prudent fiscal policies and the regional current account surplus is projected to rise further to 23 percent of GDP to around 280 billion.
On the whole, the oil-exporting nations are expected to enjoy more robust growth than the non-oil exporters. However, even the non-oil exporting countries like Egypt, Syria and Lebanon are expected to enjoy steady average growth 4.7 percent in 2006 and 5.2 percent in 2007. Much of this underlying growth is supported by favorable conditions at the regional and global levels.
The region does face some risk. Amongst those risks is the current windfall coming from high-energy prices. Higher revenues from energy exports have helped to swell government coffers and this has led to increased government expenditure on infrastructure improvements and much needed structural developments.
However, a greater portion of the windfall has been making its way into richly valued assets and asset price increases could be a sign of overheating. Regional equity markets faced a major correction in the early part of 2006 and although stability was maintained (in Saudi Arabia, Prince Alwaleed went as far as pumping some $2 billion plus to stabilize the stock market), regional economies cannot rule out the possibility of further corrections in the other asset classes.
Non-oil exporters also face the risk of external balance implications of large terms-of-trade losses. However, as the monthlong war between Israel and the Hezbollah in July showed, the most likely factor to fact growth is the external geopolitical situation. As long as international investors are weary of investing in a politically unstable region, the Middle East will not enjoy the large inflows of foreign direct investment that it may otherwise have.
The report stated that the central policy challenge for the oil exporting nations of the region was in the management of the current boom in oil revenues. The report commended the oil exporting countries for using the current windfall in energy prices to tackle long-term structural problems like the need to generate jobs for a rapidly growing market and investing in human and capital development and upgrading infrastructure.
However, the report cautioned the region that continued credit growth could cause overheating and stressed the importance for higher expenditure to go hand-in-hand with determined efforts at capacity enhancing reforms to ensure the good management of funds, thus making the economies of the oil exporters less dependent on global energy prices.
Such reforms would prioritize the need to create greater private sector participation in the economy and investments in various sectors to help diversify oil-dependent economies.
The report mentioned that if expenditure increases were appropriately in line with macroeconomic conditions and accompanied by structural reforms, pickup inflation would remain containable and temporary.
The report praised Saudi Arabia’s recent reforms that allowed foreigners to take part in its equity market, arguing that such moves helped to increase liquidity and transparency in the equity markets and would thus help reduce asset volatility.
