MENA QUARTERLY ECONOMIC BRIEF - PLUNGING OIL PRICES
In the three months since most observers, including the World Bank, issued their last forecasts, the Middle East and North Africa (MENA) Region has changed substantially. Political tensions have eased somewhat with presidential and legislative elections completed in a few countries.
Egypt’s cabinet approved the electoral constituencies’ law, the last step before calling for the House of Representatives elections, the final milestone in the political roadmap initiated in July 2013. Presidential elections were held in Tunisia, with Beji Caid Essebsi sworn in as the new president in December. Iran’s nuclear talks with the P5+1 were extended for 6 months — while bilateral talks continue —with the aim of reaching a deal in July 2015. In Iraq, the government and the Kurdish region reached an agreement in December resolving a longstanding dispute over the budget and distribution of oil revenues. Meanwhile, Lebanon, Yemen and Libya still struggle to maintain a functional government. The global economy is estimated to have expanded by 2.6 percent (q/q annualized rate), better than the second quarter of 2014, but unchanged from the slow pace seen in 2012 and 2013.
But the most important development is that international oil prices have literally collapsed, reaching a level below $50 per barrel (Brent crude) in early January, a drop of 50 percent since their peak in mid-June 2014.
Plunging oil prices will have significant consequences for both oil exporters and importers in the MENA region. Oil importers will see improvements in their current account through lower import bills; and fiscal account as the cost of fuel subsidies (some of which are as high as 10 percent of GDP) declines. The economies of oil exporters could be hurt, as oil accounts for more than half their budget revenues and exports earnings (in Yemen and Libya, oil constitutes more than 90 percent of total exports). Fiscal spending has been on the rise in these countries and they will likely run larger budget deficits or their surpluses would shrink substantially. Their external accounts would also deteriorate, which could eventually put pressure on their currencies (Table 1). The GCC oil exporters are in a much better position to cushion the impact of falling oil prices, due to their ample reserves.
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- Feb 01, 2015