Dubai: The economies of West Asia oil exporters are likely to suffer from a possible prolonged global recession as demand for the region’s main export wanes, the International Monetary Fund (IMF) said on Sunday.
Government expenditure, however, should mitigate the slowdown, the IMF said in a report released in Dubai.
Arab states in the Gulf and other oil exporters in the West Asia (Middle East) were previously seen as less vulnerable to financial turmoil as they were cushioned by accumulated windfall revenues from oil.
But with a continued oil price slide, those governments will be less inclined to maintain robust public spending, a key policy in mitigating the fallout from the economic downturn, the report said.
“A major risk to the economic outlook is the possibility of a prolonged recession. This would keep oil demand and prices low,” it said.
“If MEOE (Middle East Oil Exporters) governments come to believe that oil prices will remain depressed for a prolonged period of time, they are likely to reduce their spending to maintain fiscal sustainability.”
Although oil has lost $100 since peaking at a record $147 a barrel in July, MEOE states have maintained a high level of capital spending, going from a massive collective surplus of $400 billion last year to a projected deficit of $10 billion in 2009, it said.
Economic growth rates in Middle East oil exporters are expected to decline significantly although public expenditure should moderate the slowdown in non-oil growth, the IMF said, projecting real gross domestic product for those countries to grow 2.3% this year compared to 5.4% in 2008.
GDP growth rate in Arab countries in the Gulf, the world’s top oil exporters, is expected to slow by more than one third to 1.3% this year, according to the IMF.
The economies of the region are, however, expected to fare better than the economies of the European Union and the United States, which are expected to shrink 4.0% and 2.8% respectively, the IMF said.
“The reason why despite this drop in oil prices, they continue to do reasonably well is because most of them are using the reserves they’ve accumulated during the boom years to continue to maintain the level of public spending,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said at a panel discussion in Dubai.
“This continued public spending during the downturn is protecting their own economies and is also having positive spillover effects on neighbouring countries.”
Gulf Arab countries, for example, have witnessed a six-year oil-fuelled economic boom, triggering a rally in the real estate and financial sectors.
With the onset of the global financial crisis, governments in that region have stepped up spending to ramp up their economies.
Saudi vowed in late 2008 to maintain spending on major projects despite the global financial crisis, forecasting spending at 475 billion riyals ($127 billion) for this year.
The UAE, the second-biggest Arab economy, expected total spending across all sectors fully controlled by the government to hit 135 billion dirhams ($36.8 billion) this year, an 11% increase over 2008.
The IMF report identified Middle Eastern oil exporters as Algeria, Iran, Iraq, Libya, Sudan and Yemen and the six states of the Gulf Cooperation Council - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.