Georgieva to Al Arabiya: The Iran war is redrawing the map of the Gulf economy... and Saudi Arabia continues to grow

Listen to the article. The audio text is automated, generated by an automated system

The Director of the International Monetary Fund, Kristalina Georgieva, confirmed that the main challenge facing the region's economies is currently restoring the momentum they enjoyed before the war, noting the importance of continuing to diversify economies, rational use of financial capabilities, and strengthening cooperation among the countries of the region.

Georgieva said, in an interview with Al Arabiya Business, that previous investments, good economic policies, and financial responsibility constituted sources of strength and resilience for the Gulf Cooperation Council countries, considering that building on these foundations and continuing economic diversification will support the region’s ability to confront shocks.

The IMF praises the strength of the Gulf countries' economies and their ability to face challenges

She pointed out that the Gulf countries have taken measures over the past years to enhance job opportunities and develop alternative routes to transport oil away from the Gulf, stressing that investments in these routes remain important even if the Strait of Hormuz is reopened and not closed in the future.

She added that the joint cooperation witnessed in the region to enhance the ability to confront shocks provides new momentum for collective action, stressing that continuing to build on economic fundamentals and diversifying economic activity serves the region, in light of a number of its countries recording positive growth outside the oil and gas sectors.

Regarding Saudi growth expectations, Georgieva said that the IMF is consistent with Saudi estimates regarding the path of recovery and growth next year, pointing to three main factors that will support this path.

She explained that the first factor is the recovery of production and the increase in oil exports, even if the war continues, with the importance of continuing work on alternative paths to deliver oil to partners and exporters.

The second factor is the expectation that oil prices will continue to rise even if the war ends, given that oil reserves were withdrawn during the crisis, while the world needs time to rebuild them, in addition to the ongoing repercussions of the closure of the Strait of Hormuz.

Georgieva added that the third factor is that Saudi Arabia continues to diversify its economy and enhance its vitality.

She said that the IMF does not yet know the details of how to arrive at the numbers contained in the Saudi estimates, but it agrees with the general trend, and believes that there is momentum and great development in the Saudi economy.

Regarding the impact of energy prices on oil-exporting and importing countries, Georgieva explained that the repercussions of the war differ from one country to another.

She said that Iraq is among the countries most affected, after losing all of its oil production, while Bahrain and Kuwait were also affected to a greater extent for various reasons.

She added that other countries, such as Jordan and Egypt, felt great pressure because they are oil importers, noting that the countries of the region have taken steps during the past years to build safety margins and strengthen the fundamentals of their economies, which helps them cope with shocks better.

She stressed that the focus must be on strengths and at the same time prepare for more difficult periods.

Regarding the final review of Egypt’s program with the International Monetary Fund, Georgieva said that the specified date for completing the program is mid-December, and that the Fund plans to send its mission in line with this date, to inform the Fund’s management in a timely manner.

She stressed that decisions related to Egypt's economic structure remain the state's sovereign rights, noting that what the Fund demands and supports is providing more space for the private sector.

She explained that the private sector is more dynamic and able to adapt to shocks, and helps enhance the flexibility of the economy, adding that there is more space in Egypt to expand its role.

Regarding the possibility of Egypt needing a new program with the Fund, Georgieva said that the focus at the present time is on ending the existing program, praising Egypt’s role, and considering that the program was very positive for the Egyptian economy.

At the global economy level, Georgieva said that the rise in energy prices as a result of the Iran war led to price pressures resulting from shocks in the energy sector, which in some cases contributed to increased inflation.

She added that these pressures may push central banks to tighten monetary policy to control inflation, making the cost of servicing high debt around the world greater and leading to a tightening of financial conditions.

She pointed out that oil-importing countries, especially countries that do not have sufficient financial space, will be among the most affected, along with a large number of low-income and fragile countries and emerging markets that need to borrow.

She said that emerging markets have recently worked to reduce return differences and reduce their margins, which provides more room for growth when these pressures subside.

Georgieva explained that the global economy was negatively impacted by energy shocks, but this impact was partially offset by the momentum associated with artificial intelligence.

She said that the global economy is currently facing two forces moving in opposite directions: energy shocks that negatively affect economic activity, and enthusiasm and investments related to artificial intelligence that support growth.

Regarding bond markets and the rise in sovereign debt, Georgieva said that what the markets are witnessing reflects economic fundamentals, explaining that high inflation and energy shocks push interest rates to rise, and thus bond yields rise.

She added that debt levels have risen significantly since the Corona pandemic, noting that governments borrowed to confront shocks during the pandemic, and then did not take sufficient steps to reduce debt during periods of improvement, before returning to borrowing with the shock of the Ukraine war and energy crises.

She stressed that what is required now is for countries to assume their responsibility and develop plans to strengthen financial policy in the medium and long term.

She warned that the combination of high levels of debt, reliance on debt and equity financing, and enthusiasm related to artificial intelligence may make financing more difficult and expensive, especially in light of tightening economic and financial conditions.

Regarding the debts of artificial intelligence companies, Georgieva said that there are currently no concerns about them, explaining that these companies borrow but also make profits, and the expansion of data centers has become a reality in the global economy.

But she warned that the source of concern is the high expectations for increased productivity, and if these expectations are not actually met, this may be reflected in the markets.

She added that the occurrence of other incidents, such as artificial intelligence being out of human control, may also open a wide door for discussion about the risks associated with technology.

She stressed the need to deal with the matter from two aspects, the first of which is to establish controls and safety barriers for artificial intelligence to enhance confidence in it, and the second is to pay attention to the sector’s financing mechanisms, ensuring that profit expectations and the mix of debt and equity are supportive of investment sustainability.