The outlook for global growth has been revised down sharply in recent months. In its September 2011 edition of the World Economic Outlook, the IMF forecasts that global real GDP would expand at 4.0% in 2011 and 2012, down from a previous forecast in June of 4.3% for 2011 and 4.5% for 2012. The downward revisions are a result of economic indicators pointing towards a slower than expected recovery and the intensification of the sovereign debt and banking crisis in Europe, according to a report from QNB Capital.
Growth within the MENA region has stark contrasts with oil importers being more heavily impacted by the global economic slowdown than oil exporting countries. Both the IMF and the Institute of International Finance (IIF) have substantially revised down their forecasts for growth in oil importing countries in the MENA region. In April, the IMF forecast that oil importing MENA countries would grow by 1.9% in 2011 and 4.5% in 2012. These forecasts were cut substantially to 1.4% and 2.6% respectively in the IMF’s October regional outlook. Similarly, the IIF cut its growth forecasts for oil importing countries in MENA from 4.2% to 2.3% for 2012 (the IIF has not included Libya, Sudan and Yemen in its MENA forecasts while the IMF includes these countries and also Iran).
The impact of deteriorating global growth expectations has had a minimal effect on the outlook for oil exporting countries where high oil prices and strong hydrocarbons revenues have boosted government spending and supported growth. New spending measures announced in 2011 have increased spending by 3%-6% of GDP in most oil exporting countries. Both the IMF and the IIF have kept their forecasts for growth for oil exporting countries unchanged for 2011 and have only cut them by 0.2 and 0.3 percentage points respectively for 2012.
However, there remain some significant downside risks for oil exporting countries. Firstly, slower global growth will weaken demand for oil and could lead to a sustained drop in oil prices. The IIF argues that Saudi Arabia would cut oil production from its current high levels to ensure that Brent oil prices remained above US$85/barrel. This is the approximate average oil price at which the fiscal balances of a number of OPEC’s members would break even. Qatar’s breakeven level is considerably lower than this at about US$40/barrel, according to the IMF.
Secondly, part of the European solution to its sovereign debt crisis has involved shoring up banks’ financial position by requiring them to increase their capital adequacy ratio. This, however, could restrict lending and increase deleveraging. European banks play an important role in many MENA oil exporting countries by providing financing for major projects. This has already impacted the availability of external financing in MENA countries. Should the eurozone sovereign debt crisis worsen, limitations on external financing could hold back growth prospects in the MENA region.
MENA oil exporters have been well protected from global economic woes. However, a combination of a slowdown in global growth leading to lower oil prices and greater limitations on external financing could seriously undermine the outlook, even for MENA oil exporters. In the most extreme scenario, sovereign defaults in Europe could lead to a second financial crisis, freezing global credit, leading to world recession and a collapse in oil prices. Nonetheless, MENA oil exporters would still be in a stronger position than most countries. Their low levels of public debt, high levels of international reserves and strong fiscal surpluses would enable governments to continue to provide support to the economy, through maintaining expenditure on major development projects.