In line with its continuous efforts to support decision-making process in Arab countries, the Arab Monetary Fund (AMF) has released September edition of “Arab Economic Outlook Report” containing updated forecasts of economic growth and inflation rates for Arab countries in 2016 and 2017.
The report referred to the renewed worries over the global economic performance during the first half of 2016, as the world economy seems to be trapped in a vicious circle of slowing aggregate demand and low economic growth, which increases uncertainty facing the global economy. The report noted that while the economic conditions have improved in developed countries, yet this group of countries still suffers from declining capital expenditure, low levels of productivity and some other challenges related to labor markets due to “Aging Phenomena”. These factors added more pressures on potential output levels, which have already tended to decline in many of these countries according to the recent studies.
On the other hand, the weakness of economic activity in developing and emerging market economies could slow or set back the fragile recovery of the global economy due to several challenges facing this group of countries including low commodity prices, weak domestic and external demand levels, rising volatility in financial markets and capital flows and the need to enforce macroeconomic stability through implementing structural reforms and ensuring more coordination in macroeconomic policy frameworks.
The global economic growth achieved during the first half of 2016 was lower than the levels expected earlier this year by international organizations, which led them to revise down growth forecasts for the world economy for 2016. Therefore, the strong recovery of the global economy may still hard to be achieved, especially in light of uncertainties surrounding the global economy, particularly in the context of the uncovered consequences of Britain’s decision to withdraw from the European Union.
As for Growth Forecasts in the Arab region, the AMF report indicated that Arab economies have been affected in 2016 -like other developing countries and emerging market economies- by the developments in the global economic environment especially weak external demand levels and declining trend of oil prices. Furthermore, the uncertainty and the varying paths of economic growth and monetary policy stances in developed economies which led to wide fluctuations in capital flows to developing countries and emerging market economies added more challenges on the macroeconomic performance of some Arab countries; especially those that suffer from increasing financing gaps since 2011. On the other hand, domestic conditions in a number of Arab countries still influence their internal and external economic balances and lower growth achieved by Arab countries as a group.
The Arab oil-exporting countries have been experiencing a different economic reality since mid of 2014 due to the declining trend of oil prices which have lost about 61 percent of their values since that time till August 2016. These developments have affected the economic activities and fiscal conditions particularly in light of the important role of public spending in fostering economic growth in these countries. This new reality has enforced many of Arab oil-exporting countries to adopt some austerity measures that would affect public and private spending and may slow down growth achieved this year.
As for Arab oil-importing countries, they have benefited from low-level of oil prices which continue to enhance their fiscal space and avail some financial resources that could be directed to support economic growth. However, some countries of this group have been affected by unfavorable factors in 2016 including weak external demand, foreign exchange markets developments and drought conditions as well as by developments in neighboring countries and a further influx of displaced people. Collectively, these factors would decelerate growth pace in Arab oil-importing countries during 2016.
Notwithstanding the internal and external challenges, the Arab countries were keen to implement economic reforms aiming at achieving economic stability through enforcing policy frameworks aiming at containing macroeconomic imbalances and ensuring fiscal consolidation via a diversified set of measures. These reforms focus primarily on reforms of subsidy systems, diversification of public revenues sources, alleviation of income disparity levels, enabling the conducive environment for private sector activities especially small and medium enterprises as well as enforcing legislations to support economic growth and financial sector development.
Based on what has been mentioned and according to assumptions used in this report, the growth rate for the Arab countries as a group has been revised down by 0.30 percentage point in 2016 to reach 2.6 percent compared to the forecasted growth rate in March edition. With respect to 2017, the report expected a gradual recovery of economic growth to reach 3.1 percent owing to anticipated improvement in economic conditions in both Arab oil-exporting and importing countries due to several factors.
Arab economies are expected to grow by 2.6 percent in 2016 and 3.1 percent in 2017
On a sub-groups level, the growth rate of Arab oil-exporting countries is forecasted at about 2.4 percent in 2016 compared to 3.3 percent last year, and it is anticipated to rise to 2.8 percent in 2017. Countries of this group are expected to witness uneven growth performance. The Gulf Cooperation Council (GCC) countries are expected to be further affected by the low-level of oil prices in 2016, unlike 2015 where they were able to adopt countercyclical policies to support economic growth. Non-oil activities in this group would be impacted by fiscal austerity measures adopted in 2016 to maintain fiscal discipline in a degree varied according to their economic structure and fiscal space. GCC growth rate is expected to reach 2.1 percent in 2016 compared to about 3.6 percent in 2015 (0.4 percentage point lower than the earlier forecast). Whereas, in 2017 the growth rate is expected to rise to 2.4 percent supported by the likely increase in international oil prices, the expanded oil production capacity and the implementation of a number of investment projects in these countries. However, the extended time horizon needed to restore fiscal balance would continue to weigh on growth levels in this group of countries.
On the contrary, the other Arab oil-exporting countries are forecasted to record a low level of growth rate less than one percent in 2016, as a result of the recessionary impact of internal conditions in a number of these countries except Algeria. In 2017, the growth rate of this group is estimated to recover to 6.2 percent supported by the possible increase in international oil prices provided that a relative improvement in internal conditions in these countries would be achieved over the concerned period. Needless to say that the expected high growth rates of this group reflect mainly the lower base of growth in earlier years.
With respect to Arab oil-importing countries, they are expected to witness a slowdown in the pace of economic activity in 2016 due to several factors including the sluggish performance of the major economic sectors as a result of the continued weakness of internal and external demand levels, the developments in the foreign exchange markets and drought conditions that have been witnessed in some of these countries. Growth forecast for this group of countries has been revised down to reach 3.1 percent in 2016 compared with 3.6 percent expected in March edition. In 2017, their growth is expected to recover to 3.9 percent in line with expectations of gradual improvement in global demand and the recovery of key economic sectors due to anticipated increase in capital expenditure, consumption, and exports which would support economic growth.
Concerning Inflation Forecasts, the AMF report stated that inflation rate rose in most Arab countries during the first months of 2016. This came as a result of the increases in the prices of fuel and food products. Most Arab countries have adopted policies to reform commodities subsidy systems, especially for fuel products in 2016. The declining trend of international oil and food prices, the low growth rates of domestic liquidity and the slowing economic activities have helped to ease inflationary pressures resulted from adopting these reforms in a number of Arab countries during the year. Inflation rates have also increased in some other Arab countries due to continuing bottlenecks in the supply side of basic commodities as a result of internal developments taking place in those countries and led to a further influx of displaced people.
Collectively, the inflation rate in the Arab countries as a group is expected to rise to 7.8 percent during 2016. For 2017, it is expected that the inflation rate in the Arab countries will reach about 8.5 percent reflecting expected increase in the prices of basic commodities next year.
In the Arab oil-exporting countries, the inflation rate is expected to increase during 2016 to reach 6.3 percent compared with 4.3 percent realized in 2015. This would be an outcome of the anticipated increase in the inflation rate in GCC countries to around 3.8 percent and in other Arab oil-exporting countries to reach about 6.9 percent. In terms of inflation expectations for 2017, it is expected that they will rise in Arab oil-exporting countries to around 7.0 percent.
As for the GCC countries, the inflation rate has been affected during the first months of 2016 by the increase witnessed in the prices of fuel products and housing. The increase in the prices of fuel products was mainly related to the adoption of the automatic adjustment price mechanism in a number of GCC countries to link the domestic prices of oil products to the averaged international prices over a certain period. The low levels of international prices for oil and basic commodities helped these countries to implement those policies and avoid strong increases in the inflation levels. In addition, the decline in domestic liquidity growth rates, the slowing economic activity and high purchasing power of local currencies in most countries of this group which pegged to the US dollar also helped to ease inflationary pressures. In light of these developments, it is expected that the inflation rate in this group of countries will reach 3.8 percent during 2016. For 2017, it is expected that the inflation rate will record about 3.1 percent.
The other Arab oil-exporting countries (except Algeria) have witnessed inflationary pressures due to bottlenecks in the supply side of basic goods as a result of domestic developments in these countries, which led to the displacement of the population of some areas to other areas. Moreover, the inflation rate in some countries in this group has been affected by the adoption of subsidy systems reforms, especially for energy products and by the depreciation of local currencies. Therefore, it is expected that the inflation rate in this group of countries will record about 6.9 percent in 2016, while it is expected to increase to about 7.8 percent in 2017.
Regarding the Arab oil-importing countries, most of these countries recorded an increase in inflation rates during the first months of 2016, due to several factors including the rise in the prices of food and energy products due to policies aimed at reforming subsidy systems, the depreciation of some local currencies, and the continuing influx of displaced people from neighboring countries, which increases the demand levels. Nevertheless, tight monetary policies and the slowdown of economic activity helped to contain part of demand pull inflation in these countries during this year. In the light of the above developments, the inflation rate in this group of countries is expected to reach about 9.6 percent in 2016 and about 10.3 percent in 2017.