IMF cuts GDP forecasts for the Middle East

The International Monetary Fund’s regional director Masood Ahmed gave such a heavily qualified forecast this morning, and so ridiculed the IMF’s own model and forecasting procedures, that it became hard at times to take it very seriously. Perhaps policy makers will take note.

Central to the IMF view that the Middle East will not be as affected by the global recession as the rest of the world is that ‘the export shock is not the same’. This bares a little analysis.

Oil revenue shock

The prime export of the Middle East is oil. Opec says that oil producers revenues will fall by half this year. Exports not in shock, wake up IMF!

Mr Ahmed’s rambling presentation at the Dubai International Financial Centre drew gasps of incredulity from business leaders in the audience. There was no mention of the local real estate crisis or the billions now outstanding to construction contractors or the half-built stalled projects.

Instead the IMF regional director leant back on the old theoretical argument that oil states had huge financial reserves for a rainy day, and are now committed to spending it.

Never mind that these countries have leveraged up during the oil boom, and without the ability to borrow from foreign banks due to the financial crisis find themselves in a liquidity squeeze, presumably at least in part because oil revenues have also suddenly been cut in half.

You could almost be forgiven for thinking that the oil states do not find themselves in a state of economic crisis. Perhaps then falling company revenues across the board and redundancy programs are just an illusion.

Changeable forecasts

It is not very likely is it. The fantasy is in the minds of economists who like to pretend nothing very much has happened, except that they have had to change their forecasts. But then again as Mr Ahmed admitted this has now been done so many times that IMF forecasts are pretty useless as a guide to the future.

Now the IMF is saying GDP in Saudi Arabia will fall by 0.9 per cent this year against growth of 4.6 per cent in 2008. UAE growth will turn negative by 0.6 per cent after growing 7.4 per cent last year. And Kuwait will be the biggest loser, down 1.1 per cent against 6.3 per cent growth in 2008.

The fund points out that risks to the downside are a rise in corporate defaults in a longer than expected recession and higher interest rates on government bonds. But how long will it be before the IMF changes its forecasts again, perhaps to reflect the reality that is so painfully obvious to everybody else?