IMF warns ‘vulnerabilities high’ in the Middle East hit with dual shock of coronavirus and oil plunge

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Travelers wearing face masks to protect from them the novel coronavirus (COVID-19) while travelling through Abu Dhabi International Airport in Abu Dhabi, United Arab Emirates on February 16, 2020.

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The International Monetary Fund forecasts a dramatic contraction for Middle Eastern and North African economies this year, predicting a worse outlook for the region than for the global economy as a whole in its latest regional economic report.

The IMF expects the MENA region to contract by 3.3% in 2020, compared to last year’s projected growth of 0.3%. That’s worse than the Fund’s forecast for the world economy, which is expected to contract by 3% this year.

“Vulnerabilities are high in certain countries, especially those with high levels of unemployment and low growth,” the IMF’s Middle East and Central Asia Director Jihad Azour told CNBC on Tuesday. 

He acknowledged the possibility of civil unrest as the region’s economies face strains caused by the “dual shock” of coronavirus and low oil prices.

The IMF expects growth in Lebanon to decline by 12% in 2020. The small Mediterranean country has the third-highest debt-to-GDP ratio in the world and was facing an economic crisis long before the coronavirus pandemic set in. Egypt is the only country in the MENA region the IMF expects to grow in 2020, by 2%.

Lebanon’s ailing economy — forecast to have contracted by 6.5% in 2019 — with governance issues and rampant corruption resulted in mass demonstrations last year, and ultimately forced former Prime Minister Saad Hariri’s government to resign. The structural reforms required of an IMF bailout could have deeper social and economic repercussions, however, and push the government to look elsewhere for funds.

Both Lebanon and Iraq have explored further funding from the IMF, Azour confirmed to CNBC, as the Fund responds to an unprecedented demand for emergency assistance. The Washington-based organization provides financing to members and has $1 trillion in lending capacity.

Oil shock

Saudi Arabia and the United Arab Emirates, the region’s two largest economies, both announced large stimulus packages last month to help combat the economic impact of the coronavirus, targeting domestic banking and the private sector.

Oil exporters will be hit hard, even after the largest production cut in history was signed by OPEC and its allies on Sunday, taking 9.7 million barrels per day off the market. The agreement, Azour said, “will allow prices to stabilize.” Since the deal’s signing, prices have remained under pressure, however, with Brent crude futures down another 4% on Wednesday morning.

According to the IMF, oil exports are expected to decline by more than $250 billion across the region. The commodity itself has fallen by 50% this year, and the IMF expects the UAE’s economy to contract 3.5%, and Saudi Arabia’s to decline 2.3%.

The Fund expects the non-oil sector in Saudi Arabia to contract by 4% this year, something that will put significant strain on a country wishing to diversify its economy away from hydrocarbons. Azour said that both Saudi Arabia and the UAE, with their strong asset positions, have the capacity to respond and use some of their reserves to absorb some of the shock.

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