GCC to remain stable despite oil price decline

Dubai: In the GCC, economic growth will remain firm overall in 2014 despite gradual decline in oil prices.

The growth will be largely driven by the non-oil sector, but inflation is expected to rise, according to the latest macro economic forecast from Economists and analysts at Moody’s Investors Service.

Moody’s forecast for 2014-15 shows that oil prices will gradually decline but is expected to remain above $100 per barrel (pb) for Brent crude. “Hydrocarbon prices will continue to display relative stability, with additional output from countries that are members of the Organisation of the Petroleum Exporting Countries (Opec) offsetting additional demand from emerging markets; while unconventional oil has a high breakeven point that acts as a floor on oil prices,” said Lucio Mauro Vinhas de Souza, Managing Director — Sovereign Chief Economist of Moody’s said in Dubai yesterday.

The outlook for 2014 points to diminishing fiscal space, with actual and fiscal breakeven oil prices converging. “In order to avoid rapidly deteriorating fiscal balances, governments will have to start tightening their fiscal stance, particularly those facing higher fiscal breakeven oil prices, such as Bahrain and Oman,” said de Souza.

Although fiscal space is being squeezed because of increased government spending and decline in oil prices, all GCC countries except Bahrain is forecast to record fiscal surpluses and stable debt ratios amid manageable contingent risks from public-sector corporate debt. The breakeven oil price range is around $10-$20 per barrel below the fiscal breakeven price range, provides further credit support.

In addition, significant sovereign wealth fund (SWF) assets are a large multiple of annual government expenditure and public debt.

So far, GCC countries except for Bahrain, have maintained fiscal surpluses, and GCC governments have reinforced their creditor position with an estimated $1.9 trillion in sovereign wealth fund (SWF) assets, up from $1.3 trillion in 2010.

No immediate threat

GCC countries account for approximately 24 per cent of the world’s oil production and 11 per cent of the world’s gas production. Moody’s economists see no immediate threat to GCC countries’ external positions. “A slow decline in oil prices would not threaten the GCC countries’ external positions, with current account balances likely to remain in surplus,”. said Thomas J. Byrne, Senior Vice President of Moody’s.

For 2014, the external breakeven oil prices are expected to remain below $60 per barrel in all the GCC countries, except Oman ($84).

“We estimate that current account surpluses will range from a high of 37.7 per cent of GDP for Kuwait, to a low of 8.9 per cent of GDP for Oman. These will support US dollar pegs even in the weaker GCC countries,” said Byrne.

The non-oil economic growth in the GCC is largely supported by heavy public infrastructure spending, large public salary increases, abundant subsidies and a narrow tax base.

As this fiscal space declines, we expect the GCC governments with weaker fiscal positions to start reining in expenditure growth.