IMF: Middle East economy weathered global crisis

By Nathanael Massey - The Daily Star
The Middle East has proven surprisingly resilient to the world economic crisis, due in large part to countercyclical governmental spending, according to the International Monetary Fund’s Regional Economic Outlook report for October 2009. The report was presented Tuesday by Saade Chami and Eric Mottu of the IMF, along with Saad Andari, Vice Governor of the Banque du Liban.

“When we say that the impact of the crisis was lessened, we do not mean that Middle Eastern states were untouched,” said Chami. “Rather, we mean that the effects could have been much worse.” The prudent measures taken by regional governments allowed economies to continue functioning despite enormous obstacles, he said.

The economic crisis led to a sharp drop in oil prices, the major source of capital inflow for Gulf states. In response, oil exporters implemented expansionary fiscal policies and drew on substantial reserves built up prior to the crisis, allowing their financial sectors to continue functioning while lessoning the impact to the broader economy, according to the report.

“The use of reserve buffers … by oil exporters mitigated the impact on their own economies and generated positive spillovers for their neighbors,” said IMF Middle East Director Masood Ahmed, speaking at the original release of the REO report. “The crisis has also shown the need for continued efforts to strengthen oversight to reduce the vulnerabilities of financial markets in the region.”

Lebanon’s economy is closely tied to the Gulf in multiple sectors, foremost in banking. In addition, Lebanon’s economy relies heavily on remittances – which account for 20 percent of the national GDP – from Lebanese abroad, the majority of whom work in the Gulf.

The onset of the economic crisis sparked fears by analysts that troubles in the Gulf could have a catastrophic impact on the Lebanese economy, but as of yet those impacts have been relatively minimal. GDP growth slowed in 2009, but is still strong.

The Lebanese economy was supported as well by measures undertaken by the banking sector, Mottu said. “The response of Lebanon’s banks was both swift and appropriate, and should be taken as a model by other countries,” he said.

Lebanon’s banks hold a large part of their capital in reserve and do not invest in derivatives to the same extent as banks in other countries. Derivative markets declined sharply during the crisis.

The crisis “has revealed some vulnerability in the region’s financial sector,” according to the IMF report, specifically in terms of weak risk management systems and over-leveraged institutions. Improvement in these areas will be crucial to safeguarding the system against future shocks, it said.

The countercyclical spending by oil exporters led to a sharp reduction in national account surplus. However, the IMF predicts that reserves will rebound in 2010 thanks to rising oil prices and a rebounding world economy.

The national account balance for Qatar, for example, dropped from $28.5 billion to $10 billion in 2009, but is estimated to rocket to $32 billion in 2010. Lebanon’s account balance is negative, due to it’s high national debt, but its level has not changed dramatically during the crisis.

Merchandise exports and foreign investment have been the hardest-hit sectors of the economy. The report estimates that these sectors declined by as much as 32 percent in 2009. Tourism receipts and remittances are also lower.

The IMF report states that the current priority for Middle Eastern economies is financial market development and diversification beyond bank-based economies. Employment for the Middle East’s rising population of youth is also a major priority.