Fiscal Impact of Lower Oil Prices on Latin America and the Caribbean


By Robert Rennhack and Fabián Valencia

(version in Español and Português)

The plunge in world oil prices—from $105 to about $50 per barrel since mid-2014—has been a boon for oil-importing countries, while presenting challenges for oil exporters.

In general, oil importers will enjoy faster growth, lower inflation, and stronger external positions, and most will not encounter any significant fiscal pressures. Oil exporters will tend to face slower growth and weaker external current account balances and some will run into fiscal pressures, since many rely on direct oil-related revenues. One country that stands out is Venezuela, which had been experiencing severe economic imbalances before oil prices began to fall and now finds itself in an even more precarious position.

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Warning—Falling (U.S. Treasury) Objects


By Nigel Chalk and Jarkko Turunen

WHD.US Falling Yields.warningsignThe remarkable collapse in the price of oil—a key global price that has virtually halved in the space of just a few months—has received a lot of attention lately.

Meanwhile, another significant shift has taken place in recent months that is just as surprising and has wide-reaching global implications—the dramatic drop in long-term U.S. Treasury bond yields. The last time we saw 10-year Treasury bond yields this low was in early May 2013. As many will remember, this didn’t last long and when it corrected, it set off a burst of volatility across emerging markets.

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Time to Act on the G-20 Agenda: The Global Economy Will Thank You


2014MDNEW_04By Christine Lagarde

(Versions in 中文, Français, 日本語Русский, Türk, and Español)

Implementation, investment, and inclusiveness: these three policy goals will dominate the G-20 agenda this year, including the first meeting of finance ministers and central bank governors in Istanbul next week. As Turkish Prime Minister Ahmet Davutoğlu recently put it: “Now is the time to act” – şimdi uygulama zamanı.

There is a lot at stake. Without action, we could see the global economic supertanker continuing to be stuck in the shallow waters of sub-par growth and meager job creation. This is why we need to focus on these three “I’s”:

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Disinflation in EU Countries outside the Eurozone


By Plamen Iossifov and Jiri Podpiera

Inflation has been falling sharply across Europe since 2012 (see Charts 1 and 2). Across Central and Eastern Europe (CEE), inflation expectations have also drifted down especially among countries who peg their currencies to the euro (Bulgaria, Croatia, as well as Lithuania, which adopted the euro on January 1, 2015), but also in those that target their inflation rate (the Czech Republic, Hungary, Poland, and Romania).

The recent drop in world oil prices has re-ignited the debate about good vs. bad disinflation. For the euro area, risks from low inflation have been discussed in the March 2014 iMFdirect post. Our blog examines the causes and potential consequences of falling inflation from the perspective of EU countries outside the euro zone.

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Learning to Live with Cheaper Oil in the Middle East


masood-ahmedBy Masood Ahmed

(Version in عربي)

The steep decline in global oil prices, by 55 percent since last September, has changed the economic dynamics of oil exporters in the Middle East and North Africa. Our update of the Regional Economic Outlook, released yesterday, shows that these countries are now faced with large export and government revenue losses, which are expected to reach about $300 billion (21 percent of GDP) in the Gulf Cooperation Council and about $90 billion (10 percent of GDP) in other oil-exporting countries.

Where prices will eventually settle is, of course, uncertain, making it hard for policymakers to gauge how much of the bane is temporary in nature and what share of it they should expect to last.

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Global Economy Faces Strong and Complex Cross Currents


WEOBy Olivier Blanchard

(version in Español)

The world economy is facing strong and complex cross currents.  On the one hand, major economies are benefiting from the decline in the price of oil.  On the other, in many parts of the world, lower long run prospects adversely affect demand, resulting in a strong undertow.

We released the World Economic Outlook Update today in Beijing, China. The upshot for the global economy is that while we expect stronger growth in 2015 than in 2014, our forecast is slightly down from last October.  More specifically, our forecast for global growth in 2015 is 3.5%, 0.3% higher than global growth in 2014, but 0.3% less than our forecast in October. For 2016, we forecast 3.7% growth, again a downward revision from the last World Economic Outlook.

At the country level, the cross currents make for a complicated picture. Good news for oil importers, bad news for exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which still show scars of the crisis, not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar. In short, many different combinations, many different boxes, and countries in each box.

Let me expand a bit on some of these themes.

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Seven Questions About The Recent Oil Price Slump


By Rabah Arezki and Olivier Blanchard[1]

(Versions in عربي中文, Français, 日本語Русский, and Español)

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.  Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.  

In summary: 

  • We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.
  • While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
  • Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.
  • Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation. 
  • The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes.  
  • In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.

Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF’s next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability. 

What follows is our attempt to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is this supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

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