The market sentiment in the Middle East, Afghanistan, North Africa, and Pakistan (MENAP) and the Caucasus and Central Asia (CCA) regions remains vulnerable to uncertainties stemming from global tensions and geopolitical developments, according to the IMF.
The IMF’s report for the Regional Economic Outlook noted that sanctions against Iran will undercut its near-term trade and growth prospects, increasing the risk of spill overs. They added that the developments in Turkey could impact some countries’ trade and financial linkages, as well as through market confidence effects.
A worsening of these developments, or faster-than-anticipated monetary policy tightening in advanced economies, increases the risk of a sudden reversal in global risk appetite, noted the report.
The MENAP and CCA regions would be vulnerable in this environment, especially in those countries that rely heavily on international capital to meet external financing needs.
With higher US interest rates, a stronger US dollar, and some episodes of financial market volatility, pressure points have emerged in some emerging market (EM) and developing economies.
During the second and third quarters of the year, the US Federal Reserve has raised the federal funds target rate by 75 basis points and has signalled additional tightening of 100 basis points by the end of 2019, which pushes the global financial conditions for more tightness.
Oil prices increased above $75 a barrel in June, marking the highest level since November 2014, reflecting the collapse in Venezuela’s production and unexpected outages in Canada and Libya, according to the IMF report.
Prices dropped back to about $70 a barrel following the June 2018 decision by the OPEC and other major oil-exporting countries to increase production, but prices have increased recently due to geopolitical tensions, added the report.
The weaker outlook for the euro area could pose challenges for some countries in MENAP and CCA regions particularly for oil importers with strong trade ties. These regions may also face headwinds from the projected moderation in activity in China.
Meanwhile, the report said that the recent developments in Argentina, Turkey, and other EMs led to the sovereign spreads of MENAP oil-importing countries to move broadly in line with other EMS, rising by about 100 basis points between April and August.
The MENAP region is exposed to financial market volatility which raises new challenges, particularly for countries in need of international borrowing, noted the report, adding that there is growing concern about rising risks, particularly as the global environment becomes less favourable.
The indirect impact of escalating global trade tensions could be significant through their negative effect on commodity prices, and the growth prospects of key CCA trading partners, according to the report.
Growth in the CCA region exceeded expectations in 2017, reaching 4.1%, supported by higher commodity prices, robust external demand, and fiscal stimulus in some countries.
The CCA’s growth is expected to remain steady at 4% in 2018 and 2019, and to stabilise at about 4.2% over the medium term, much lower than the average 9%, which was experienced in the first decade of the century. For the oil exporter countries in the region, growth is projected to remain broadly stable at 3.8% in 2018 and 3.9% in 2019.