23 Apr, 2016

Oil & Conflicts signal beginning of the end for Gulf travel boom

Imtiaz Muqbil

In a report that signals the beginning of the end of the Gulf inbound and outbound travel boom, the International Monetary Fund has forecast a bleak future for the Gulf countries whose fragile economies are set to be rocked by low oil prices, raging regional conflicts and the emergence of Iran.

In a media briefing at the annual meetings of the International Monetary Fund earlier in April, Mr Masood Ahmed, Director, Middle East and Central Asia Department, IMF, said that impact on government budgets will require the oil-exporting countries to make economic adjustments even as they face the continued challenge of creating jobs for their young people.

He said, “In the April World Economic Outlook, we have downgraded our projections for growth for nearly all of the oil exporters in the Middle East and North Africa, even compared to the numbers we had in January. The numbers that we had in January were themselves significantly downgraded in terms of growth projections from the numbers that we had a few months earlier, so that impact continues.”

He added, “If you look out not just for this year but for the next five years, what we are seeing, the (IMF) teams that are working on these countries and the country authorities themselves, is growth rates that are below what they had say in the 2000-2010 period. What that means is that if your medium term growth projections are now coming down, they are becoming more modest, then the challenge of providing enough jobs for the populations that are young and looking for employment in these countries is going to be even more acute going forward than it has been in the past. We all know that youth unemployment is a chronic problem in these countries.”

The forecast in a press briefing on April 15, 2016, comes just before the Arabian Travel Market where the impact of the economic and geopolitical upheavals is certain to be a subject of much background and foreground discussion. Travel & tourism, both inbound and outbound, is sure to hit by the ripple-effect of this downturn.

Mr. Ahmed began the briefing by noting: “The (economic) outlook is really shaped by two things, oil and conflicts. As you know, the oil price has gone down a lot, 70 percent. That has had a big impact on the oil exporters in the region.” The forecast is that even by 2020, “oil prices are still only expected to recover modestly, to about US$50 by then.”

The second factor, conflicts in Iraq, Libya, and Syria, and Yemen, have intensified with a horrendous cost in terms of human lives, the damage they are creating for those societies, and the subsequent rise in the large numbers of displaced people. This is having an impact on the neighboring countries’ own economies, in trying to manage that cost.

Mr. Ahmed added, “Also, in terms of the impact on confidence, on trade, so conflicts are having an effect, a dampening effect throughout the region.”

He said that the overall, the IMF had upgraded the 2016 growth forecast for the oil exporters mainly due to the increased growth in Iran, because of the effect of lifting sanctions and the higher oil production that comes from it.

“In Iran this year, we are expecting an extra 600,000 barrels or so per year of oil production. That and the other effects of sanctions relief will see an improvement in growth in the Iranian economy to about 4 percent, and that is one of the big reasons why you see the aggregate number going up. The other reason is that in Iraq, you see an increase in oil production for this year, which also shows up in the aggregate.”

However, economic growth for the GCC as a group is projected to slow further this year. “Last year, it was 3.75 percent. This year, it will be just short of 2 percent as these countries are tightening their public spending in response to the oil price drop.” Oil export revenues have dropped by US$390 billion in 2015 over 2014, and projected to drop further this year.

“This, of course, translates not only into the impact on the balance of payments but also into the budget. …. Last year, faced with this decline in revenues, many countries, most countries in the region made quite substantial efforts to cut back on public spending. Despite that, of course, the budget deficits went up enormously because the cutback in revenues was even greater.

“This year, we see that despite the efforts to cut back on public spending, we’re going to see actually a widening of the deficits in most countries. Why? Because in fact oil prices for this year, 2016, on average are expected to be lower than the average figure for last year. So, in fact, their efforts to cut back are being overtaken by the further drop in revenues.

“Now, what does this mean? It means that really this effort to consolidate their budgets by cutting back spending, by trying to raise normal revenues, is something that in most of the countries in the region will need to continue over many years. So, this is a multi-year adjustment effort to try to balance their budgets over time.”

Mr. Ahmed said that most of these countries have accumulated financial resources and the capacity to borrow from the markets, which enables them to spread this process out over time. Hence, he said, “They don’t have to make the adjustment brutally. They have to do it in a gradual way, but it is an adjustment that has to be made.”

In addition to balancing the budgets, he added, “a second challenge, which is perhaps even more important for many of them, is to make sure that despite this cutting back in public spending, and despite the impact of making the public sector smaller as a share of the economy, they have to create in their economies jobs for young people.

“To create those jobs in the future, they will have to come more and more from the private sector, those jobs, and the private sector itself will have to adjust to working in an environment where the governments no longer are their main clients, because the governments no longer have the same capacity to spend as they did before.”

He said that amongst policymakers in virtually all of the oil exporting countries, “there is a clear understanding that there is an issue out there, and there is a recognition that they need to be quite proactive in tackling that issue.”

Shifting to the oil importing countries, Mr. Ahmed said, they “are beginning to see economic growth finally starting to pick up after a few years of stagnation, but the recovery that we see is quite fragile and quite uneven.” Projections are for 3.75% this year, about the same as last year.

He said lower oil prices are giving them some relief on their balance of payments and allowing them to reduce subsidies on imported energy products. These countries, too, are making major economic reforms which are slowly showing results.

One reason for the fragile and uneven growth projection is security, conflicts and their spillovers, he said. In countries such as Lebanon, Jordan, Tunisia, growth rates still “are not in the kind of range you would want them to be because of the spillovers from conflicts. In the case of Tunisia you have tourism, which is about 7 percent of the economy, 50 percent of tourism has gone down” because of terrorist attacks.

Another risk factor is that many of the oil-importing countries are quite connected to the oil-exporting GCC countries in terms of remittances, trade, investment and tourism.

“So, as the GCC countries are cutting back on some of their expenditures, public spending, that also has some negative spillovers on some of the neighboring countries. So, you are beginning to see some anecdotal stories now of remittance flows being cut back in countries like Lebanon, in countries like Pakistan you see a slow down in remittances, and countries that have a number of workers in the GCC countries are beginning to worry a little bit about that. Similarly, on tourism, you hear some stories now, anecdotal, not yet showing up in big numbers, similarly, you hear stories now on investments. There are some specific projects that are being postponed.”

He indicated that the path ahead is not going to be easy. High debt levels will require continued fiscal consolidation and in some cases, greater exchange rate flexibility to help with competitiveness. So far, the countries have been able to avoid macroeconomic instability.

He concluded, “If you look out not just for this year but for the next five years, what we are seeing, the teams that are working on these countries and the country authorities themselves, is growth rates that are below what they had say in the 2000-2010 period.

“What that means is that if your medium term growth projections are now coming down, they are becoming more modest, then the challenge of providing enough jobs for the populations that are young and looking for employment in these countries is going to be even more acute going forward then it has been in the past. We all know that youth unemployment is a chronic problem in these countries.

“Really, the need to embark on the kinds of reforms that would make these economies more competitive, where jobs could be created through growth and where they could reel in their public spending towards more job creating infrastructure and less spending on current things like their public sector wage bill, would help to improve the growth rates for the medium term for this group of countries.”

Mr. Ahmed went on to discuss and answer a number of questions related to the future of economies in Egypt, Tunisia, Iran, the Central Asian Republic and Palestine. The full text of the transcript can be read here: https://www.imf.org/external/np/tr/2016/tr041516c.htm