IMF cuts global growth forecast on oil and political risks

13 April 2016

Washington-based IMF warns that the global growth is vulnerable to economic shocks

The International Monetary Fund (IMF) has cut its global economic growth forecast for the fourth time in a year, saying that the global economy was vulnerable to shocks such as sharp currency devaluations and worsening geopolitical conflicts.

The IMF warning came ahead of its annual spring meetings with the World Bank this week, the Washington-based fund cited risk of political isolationism, notably Britain’s possible exit from the European Union, and the risk of growing economic inequality as threats to the global growth.

In its World Economic Outlook report, IMF has forecast global economic growth of 3.2 per cent this year, compared to a forecast of 3.4 per cent in January. The growth estimate was cut in July and October of 2015. Next year IMF sees global economy growth at 3.5 per cent, down 0.1 percentage point from its January estimate.

“In the UK, the planned June referendum on European Union membership has already created uncertainty for investors; a “Brexit” could do severe regional and global damage by disrupting established trading relationships,’’ IMF said in the report. “ Another threat is that persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment.’’

IMF highlighted a worsening economic slowdown spillover from China, now the world’s largest economy on a purchasing-power-parity basis, and the impact of low oil prices on emerging markets as increasing worries. It also listed persistent economic weakness in Japan, Europe and the US as contributing negative factors for global growth.

“In brief, lower growth means less room for error,” Reuters cited IMF’s chief economist, Maurice Obstfeld as telling a press conference, adding that “scarring effects” from years of tepid growth could in turn weaken demand, thin the workforce, and reduce potential output further, creating a scenario of “secular stagnation.”

The IMF has slashed Japan’s growth forecast for 2016 in half to 0.5 per cent. Brazil’s economy would now shrink by 3.8 per cent this year versus the previous forecast of a 3.5 per cent contraction, as Latin America’s largest economy struggles through its deepest recession in decades.

The US also saw its 2016 growth forecast cut to 2.4 per cent from 2.6 per cent. The IMF said it anticipated an increased drag on U.S. exports from a stronger U.S. dollar, while low oil prices would keep energy investment weak.

Saudi Forecast

For the broader Middle East, North Africa and Pakistan region IMF has cut the growth estimates this year to 3.1 per cent from previous 3.6 per cent.

The growth prospects for Saudi Arabia, the largest regional economy, was unchanged at 2.1 per cent for 2016 in the latest report. The kingdom’s economy was projected to grow by 2.3 per cent in the IMF’s October 2015 report. It is expected to post a current account deficit of 10.2 per cent in 2016, which is expected to contract to 6.1 per cent in 2017. The gross domestic product (GDP) next year is expected to grow by 1.9 per cent.

“The steep decline in oil prices is weighing heavily on the macroeconomic outlook in Saudi Arabia,’’ according to IMF report. “Structural reforms to rebalance the economy toward nonoil activities and the private sector are essential.’’

Despite the significant fiscal consolidation in 2015, further spending restraint and revenue measures—including energy price reforms, containing the wage bill, prioritizing capital spending, and expanding non-oil tax revenues—will be necessary, according to the report, which added that the kingdom needs to come up with a “credible and well-communicated’’ medium-term fiscal consolidation plan.

The US-based Fitch Ratings on 12 April downgraded Saudi Arabia’s long-term ratings due to lower estimates for oil prices in the next two years. The country’s long-term foreign and local currency issuer default ratings (IDR) were downgraded to ‘AA-’ from ‘AA’ with Fitch maintaining its negative outlook for the kingdom.

The ratings agency revised its assumptions for crude prices down to $35 a barrel for 2016 and $45 a barrel for 2017 and said that the Saudi government’s deficit widened to 14.8 per cent of GDP in 2015 after a deficit of 2.3 per cent in 2014.

Saudi Arabia, the top oil exporter in the world, is waging a price war against the US shale producers to protect its share of the global oil market. The kingdom expects a SR326bn ($87bn) budget deficit this year. The SR444.5bn of oil proceeds in 2015 represented 73 per cent of the kingdom’s total revenues. This is 23 per cent less than the income generated from the sale of crude a year earlier.

To offset the impact of shrinking revenues, the kingdom has embarked on an austerity campaign and it has been drawing down on its foreign reserves. Riyadh has slashed spending and capped award of new projects. It has identified 146 state-owned entities that could be privatised or sold to the public as the country looks to monetise assets to meet budget shortfalls. The list includes subsidiaries of core government ministries and government-related entities (GREs), sources familiar with the matter told MEED on 27 March. Among those is Saudi Aramco, the world’s biggest oil producer which could be listed as early as 2017.

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