1. Implications of the Global Turmoil on Economic Outlook for MENA Countries, Afghanistan, and Pakistan Masood Ahmed Director, Middle East and Central Asia Department Dubai, February 2009

2. Outline The Global Outlook The Outlook for MENAP Oil-exporting countries Emerging markets and developing countries Risks to the Outlook

3. The Global Outlook

4. Global financial system slowly coming back from the brink Interbank Markets (3-month LIBOR minus T-bill rate; in percent) U.S. Japan Euroarea 1/22 Bank CDS Spreads (5-years; basis points) U.S.median Europemedian 1/22 High-Grade Spreads (basis points) U.S. Europe 1/22 SovereignEMBI

5. Heat Map of Systemic Asset Classes Emerging markets Corporate credit Prime RMBS Commercial MBS Money markets Financial institutions Mortgage Related ABS And the spread of the crisis to emerging markets will continue Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

6. Three major channels of transmission to emerging markets Declining External Demand and Exports Lower Commodity Prices Tighter Credit (External Financing)

7. Emerging economies’ growth slowed by falling exports and industrial Production... Industrial Production (in percent change from a year earlier) Emg. Asia Nov.08 Merchandise Exports (in percent change from a year earlier) Latin America Emg. Asia Latin America Nov.08 Emg. Europe Emg. Europe

8. ...And lower commodity prices Commodity Price Indices (index: Jan. 2002=100) Proj.

9. And financial pressures Sovereign CDS Spreads (index: 7/1/2007=100) Current account surplus or small deficit Current account deficit larger than 5% of 2007 GDP Equity Prices (index: 7/1/2007=100) Current account surplus or small deficit Current account deficit larger than 5% of 2007 GDP 1/22

10. Global economy heading for major downturn Real GDP Growth (Annual percent change)

11. All regions affected... Overview of the World Economic Outlook Projections (Year on Year) Projections Difference from Nov. 2008 WEO Projections 200720082009201020092010 World output5.23.40.53.0-1.7-0.8 Advanced Economies2.71.0-2.01.1-1.7-0.5 United States2.01.1-1.61.6-0.90.1 Euro Area2.61.0-2.00.2-1.5-0.7 Emerging and Developing economies8.36.33.35.0-1.8-1.2

12. The uncertainty surrounding the outlook is unusually large Downside risks continue to dominate Pernicious feedback loops between real activity and financial markets intensify further. More prolonged and severe process of deleveraging. Current policy efforts not sufficient. Further deterioration in global financial conditions accompanied by sudden stops and disruptive currency depreciation in a number of emerging markets

13. Strong and coordinated policy efforts are needed to rekindle activity at the global level Financial sector: Restore normal functioning of financial markets. Monetary policy: Unlock key credit markets. Fiscal policy: Timely and coordinated implementation of stimulus, use available fiscal space, but keep an eye on long-term sustainability.

14. Economic Outlook for the Middle Eastern Region (MENAP) Afghanistan Jordan Kuwait Lebanon Oman Qatar Saudi Arabia Syria United Arab Emirates Yemen Bahrain Iran Iraq Egypt West Bank and Gaza Pakistan Morocco Algeria Djibouti Libya Mauritania Somalia Sudan Tunisia MENAP Oil Exporters (12) MENAP Developing Economies (10)

15. The slump in global demand has led to a collapse in commodity prices Oil Prices (In U.S. dollars per barrel)

16. Lower oil prices hitting MENAP oil exports Total Exports and Fiscal Revenue

17. But governments likely to maintain spending Total Imports and Fiscal Expenditure (In billions of U.S. dollars)

18. External and fiscal balances to deteriorate Current Account and Fiscal Balances (In percent of GDP)

19. Growth in oil producers is expected to slow... Real GDP Growth, Oil-Exporting Countries (Annual percent change)

20. Growth in MENAP oil producers is expected to slow... Real GDP Growth (Annual percent change)

21. GCC: Key Economic Indicators 200720082009 Real GDP growth (in percent)5.36.83.5 Inflation rate (in percent)6.310.66.3 Oil exports (in billions of US$)411584298 Government revenue from oil (in billions of US$) 314460257 External current account balance (in percent of GDP) 25.027.5-0.1 Fiscal balance (in percent of GDP) 17.622.8-3.1

22. The global slowdown will have a significant impact on growth in MENAP Developing Countries Real GDP Growth (Annual percent change)

23. Global slowdown is expected to hit export growth... Exports and Remittances (Annual percent change)

24. ...but the external position is expected to improve External Current Account Balance (In percent of GDP)

25. ...while fiscal cushion is absent in most of these countries Overall Fiscal Balance (In percent of GDP)

26. Risks to the Outlook

27. Oil prices do not recover as expected Oil Break Even Prices, 2009 (U.S. dollar per barrel)

28. Global growth and investor sentiment weaken further Weaker exports, tourism, and remittances decline Sudden stops or reversal in capital flows Slowdown in Europe impacts North Africa Slowdown in MENAP oil producers impacts the whole region

29. Asset price corrections deepen further Change in Stock Market Indices (Jan 01, 2008 – Jan 23, 2009, in U.S. dollars)

30. Key Policy Messages Oil producers: Maintain fiscal spending Emerging markets: Exploit fiscal space if available Apply some monetary stimulus, if possible Enhance financial supervision and monitoring