Dubai: The sharp fall in oil prices during the last quarter and the volatility on the regional financial markets have triggered the fear of another regional economic slump.
From public policy forums to private chats, people are discussing the future of Gulf economies in the context of falling oil prices. Clearly decline in oil prices has cast doubts on the GCC governments’ ability to sustain the planned level of spending in 2015.
While few expect massive spending cuts in the short term, many analysts and policy experts say a sustained fall in oil prices over a very long period of time could force some fiscal adjustments in the region; the impact on the planned government spending will be minimal over the next two years.
“What we understand currently is that the oil prices will have only limited impact on the economy. I don’t see mass exodus of people or companies reducing their staff causing the kind of panic we saw 5-6 years ago during the financial crisis. We have been watching the consumer spend during the last two months, and we haven’t seen any dramatic decline,” said Abdul Aziz Al Ghurair, CEO of Mashreq.
The release of expansionary budgets by Saudi Arabia, Dubai and Oman has set aside all speculations relating to spending cut. Higher budget outlays point to the region’s governments’ willingness to spend their way out of any potential squeeze from oil price slump.
Saudi Arabia has budgeted revenues of 715 billion riyals ($190.7 billion) in 2015 whereas expenditures are estimated at 860 billion riyals resulting in a fiscal deficit of 145 billion riyals. Dubai earlier this month unveiled a balanced budget at Dh41 billion ($11.2 billion), its largest budget since the global financial crisis, implying a strong growth of 9 per cent as compared to 2014. Top officials of other GCC governments, including Abu Dhabi, Qatar and Kuwait, have affirmed spending on economic development will not be cut.
“I don’t expect a drastic slowdown in public spending across the GCC because of the decline in oil prices. There could be some slowdown in growth in the short run but this is temporary and the growth is expected to bounce back as oil prices recover,” said Henry Azzam, the former head of Deutsche Bank in the region.
Analysts say most GCC governments’ spending power is not a direct function of current oil prices. On the contrary most governments use accumulated surpluses to iron out revenue variations resulting from oil market volatility. Private sector investments, although are dependent on government spending is not directly related to oil prices.
The drop in oil prices is projected to reduce GCC’s hydrocarbon export receipts from a peak of $743 billion in 2012 to about $410 billion in 2015, leading to weaker current account positions and pressures on fiscal accounts, including fiscal deficits in countries such as Saudi Arabia, Oman and Bahrain. Investment bank VTB Capital estimates that at an average oil price of $60, the assets of the four big GCC states could fund public spending at current levels for two to five years, or cover budget deficits for four to 14 years — all without recourse to debt.
“The GCC countries are much better positioned to cope with a slump in oil prices today than they were in the 1980s and 1990s. Ample public foreign assets and low debt in most of these countries will mitigate the adverse impact of low oil prices on economic activity and allow continued robust public spending, particularly on infrastructure,” said Garbis Iradian, Deputy Director of Institute of International Finance (IIF).
Globally many oil exporters’ currencies have faced massive depreciation following the recent oil price slump, but so far there has been no significant pressure on GCC’s dollar pegged currencies. The peg has served the GCC economies well in supporting macroeconomic stability and private sector confidence.
Economists expect the impact of low oil prices on non-hydrocarbon growth will greatly depend on the policy response of the governments in the region. “We expect continued growth in government spending (particularly on infrastructure), but at a somewhat slower pace than in recent years. This would help limit the impact on non-hydrocarbon growth, which could moderate from 5.6 per cent in 2014 to 4.7 per cent in 2015,” said Giyas Gokkent, senior economist at IIF.
With a flat oil production, overall GCC’s GDP growth in 2015 is projected at 3.4 per cent, as compared with 4.1 per cent in 2014. The aggregated fiscal balance will shift from a surplus of 4.8 per cent of GDP in 2014 to a deficit of 2.1 per cent in 2015. While the fiscal deficit in Saudi Arabia expected to be around 10 per cent of GDP, the fiscal balances in the UAE, Kuwait, and Qatar would still remain in surplus, albeit much smaller than previous years.
Among the GCC countries Kuwait and Qatar are the most resilient, given their very low fiscal and external break-even oil prices, and large reserve buffers. Saudi Arabia and the UAE exhibit slightly weaker fiscal fundamentals and higher external break-even oil prices than Kuwait and Qatar. However, all four sovereigns have similar shock absorption capacities, given Saudi Arabia’s and the UAE’s large non-oil sectors and sizeable reserves.
“Overall, we remain broadly positive on the main GCC economies — UAE, Saudi Arabia and Qatar. OPEC’s GCC producers were central in the decision not to lower the bloc’s output ceiling, which reflects their economic strength and ability to compete for market share, in our view. Low debt and strong reserve positions allow these countries to further their central developmental objectives, and we do not see a major change in their stance at this point, said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
While the sovereign wealth funds of Kuwait, the UAE, Qatar and Saudi Arabia can cover multiple years’ worth of government expenditures, Bahrain’s and Oman’s do not provide that level of cover. Of the two sovereigns, Oman’s overall government finances are healthier, while Bahrain’s external position is stronger.
