Sunday, April 26, 2009

Middle East under economic strain despite oil wealth

Tarek El-Tablawy
Daily Star-Lebanon
Associated Press

CAIRO: The world's worst economic recession in about six decades is hammering the nations of the Middle East, with falling commodity prices severely straining economies and wealthy oil producers digging into their IMF savings to sustain spending. The IMF's latest World Economic Outlook, released on Wednesday, offers another unwelcome reality check for the volatile region, where officials from the United Arab Emirates to Egypt, Iran to Lebanon have tried to cast a rosy glow on growth prospects.

Mideast officials have pointed to prudent fiscal policies and stringent bank lending practices as key safeguards leaving them less exposed than other nations to the US meltdown that sparked the current recession.

To a degree, the assurances were sound. Several regional central banks have been proactive, cutting interest rates and injecting liquidity into the financial sector as governments drafted stimulus packages or offered bailouts.

Overall, Mideast nations are poised to see growth rates of about 2.5 percent this year, down from 6 percent in 2008, the IMF said. That level is still higher than overall global estimates, with the IMF projecting that world output would decline by 1.3 percent this year.

But the Middle East faces other challenges, including slumping oil prices, plus declining tourism revenues, exports and tightening liquidity and access to credit.

An over 60 percent fall in world oil prices since mid-July has siphoned off a key revenue source. That is despite the Organization of the Petroleum Exporting Countries' efforts to engineer a price rebound.

The best the group has achieved is a tentative price floor of between $45 to $50 per barrel as demand continues to decline.

Saudi Arabia and most other Gulf Arab nations have been able to stave off the worst of the collapse by tapping into cash surpluses from years past to sustain government spending. Even so, the IMF says the kingdom's real gross domestic product growth is expected to drop from 4.6 percent in 2008 to -0.9 percent this year before rebounding to 2.9 percent. For Iran, the decline in oil prices presents a serious challenge.

Analysts say Iran has spent heavily from the revenues accrued during crude's surge, mostly on populist projects aimed at bolstering support for President Ahmadinejad. But with oil accounting for 80 percent of its foreign income, the economic strain could present a major challenge for the hardline president who faces re-election in June.

Iraq faces a similar challenge from slumping oil prices.

It needs the money to rebuild after the US-led war to topple Saddam Hussein's regime. But security concerns have largely kept foreign firms out of the country, undercutting a push to boost production.

The IMF said that among the oil producers, the UAE is expecting the sharpest slowdown.

Dubai, one of the seven semi-autonomous sheikdoms of the UAE, has turned from Arab boomtown to debt-saddled city-state during the crisis.

It now faces delays or cancellations of glitzy projects like skyscrapers, plus layoffs in its overwhelmingly expatriate work force. Investors have fled and property prices slumped amid strains on its financial sector. The federal government has stepped in with a bailout.

The IMF projects that the UAE's overall growth is expected to drop from 7.4 percent in 2008 to -0.6 in 2009 before rebounding slightly to 1.6 percent next year.

Among other Mideast nations, Qatar stood out boasting the strongest growth 18 percent because of expanding natural gas production. Lebanon, however, is expected to experience the steepest slowdown because of the cost of servicing debt and a fall in remittances from workers in the Gulf, the report said.

Egypt, which lacks significant oil wealth, faces a triple challenge of slumping revenues from tourism, the Suez Canal and worker remittances. The IMF projects the key US ally will see growth halved from 2008 levels of 7.2 percent.

Even if Mideast countries weather the crisis this year, significant risks remain, the IMF cautions.

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