Other MENAP oil exporters are expected to experience similarly positive spillovers from stronger U.S. growth. Because these countries have more limited global financial ties and weak monetary policy transmission, the adverse consequences of U.S. monetary policy normalization are likely to be smaller
MENAP oil importers stand to gain should stronger U.S. growth spill over into higher growth in their main export destinations and remittance sources (the euro area, the GCC, and emerging markets)— notwithstanding the downside risks of U.S. monetary policy normalization that could lead to further global financial market volatility (Figure 1.3.3). At the same time, many of these countries peg their currencies to the U.S. dollar. The resulting nominal exchange rate appreciation against the euro would hurt their competitiveness, and direct pass-through of higher U.S. interest rates would be limited by weak monetary policy transmission. Though the historical correlations of long-term bond yields have been low, global financial market turmoil could raise external borrowing costs for governments, corporations, and banks, in turn raising domestic private sector lending rates and running counter to monetary easing policies amid still large negative output gaps.
Macroeconomic policies can help augment positive spillovers while mitigating the negative ones. Solid macroeconomic fundamentals—including broad-based economic growth, robust current account positions, low inflation, sustainable public debt, and liquid financial markets—should amplify positive spillovers to growth and support investor confidence, mitigating any adverse financial market reactions. Financial system resilience to asset price volatility and a sudden decline in market liquidity can be strengthened through macroprudential policy and risk monitoring.
