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IMF Downgrades MENA, Saudi Growth; Is It Enough?

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The IMF, in its 19 January update to its World Economic Outlook (WEO), revised down its projections for global, MENA and Saudi growth for 2016.

But, as with the World Bank’s similar forecasts earlier this month, the IMF’s oil price assumptions are already way out of date, and as a result its MENA economic forecasts way optimistic.

The IMF has chopped 1 percentage from its Saudi growth projections for 2016 and 2017, compared to those it made in the October 2015 edition of its six-monthly World Economic Outlook, its flagship publication (while the bulk of by-country forecasts are only revised in the main six-monthly report released in April and October, those for key countries and regions receive 3-monthly interim revisions). point from its Saudi growth projections for 2016 and 2017, compared to those it made in the October 2015 edition of its six-monthly World Economic Outlook, its flagship publication (while the bulk of by-country forecasts are only revised in the main six-monthly report released in April and October, those for key countries and regions receive 3-monthly interim revisions).

It now projects that the kingdom will grow by just 1.2% in 2016 and 1. 9% in 2017, down from an “estimate” of 3.4% for 2015 (the 2015 number is for now left unchanged: this will surely also be revised down).

For MENA as a whole, the IMF now forecasts 3.6% growth for both 2016 and 2017. Though these numbers represent downward revisions of 0.3 and 0.6 percentage points from the forecasts made three months earlier, they still indicate a sharp rise in growth from 2.5% for 2015 – a rather bullish projection for a region whose key economies are dependent on hydrocarbon exports given that oil prices have tanked.

Over-Optimistic Oil Price

A look at the small print indicates why. Though the report was issued this week, the oil price assumptions are based on futures markets as of 10 December, giving $41.97/B for 2016 for an average of Brent, WTI and Dubai crude, and $48.21/B for 2017.

Futures markets now indicate prices around $8/B lower. Saudi Arabia and the region’s other key oil exporters (with the possible exception of Iran, for which the World Bank is predicting 2016 growth of 5.8%) will be lucky to notch up growth of any sort this year.

IMF research director Maurice Obstfeld acknowledges the problem. “Saudi Arabia faces a very difficult adjustment…Given the high oil dependence of the economy, oil prices which were lower for longer than we forecasted at the time we did the growth forecast would pose a risk. Since we formulated that forecast oil prices have come down,” he said when quizzed at the report’s 19 January launch press conference.

China Crisis? Not According To The IMF

As for China, now neck-and-neck with the US as the world’s top oil importer (MEES, 15 January), the IMF leaves its 2016 growth forecast unchanged at 6.3%. “For China…there are challenges for the authorities to navigate, but we don’t see some of the extreme downside scenarios that the market seems to be keying off of,” Mr Obstfeld says, referring to the recent collapse in the country’s stock markets.

According to recent analysis carried out by The Economist, the IMF’s forecasts in its six-monthly WEO have a history of massively overestimating the extent to which the future will look like the past – the IMF’s default option is to tweak the previous year’s number; it almost never predicts a rapid shift in direction.

The headline finding of the latest WEO update, released 19 January looks suspect in this regard. The IMF now has the world economy growing from 3.1% for 2015 to 3.4% in 2016 and 3.6% in 2017. Thus, although the IMF has been prepared to revise down its 2016 forecast from that of 3.6% made three months previously, this follows a pattern of any such revisions being modest and facing a strong countervailing headwind of a presumed regression to the mean; and for global growth the long term mean is taken to be around 4%/year.

Common sense suggests that expecting stronger growth in 2016 than 2015 is a tall order. For the 189 countries for which the IMF published growth forecasts in its six monthly WEO between 1999 and 2014, there were 220 instances where an economy grew in one year before contracting the next.

How many of these 220 instances had the IMF flagged up by April of the preceding year? Precisely zero.

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