Dubai: A decline in oil prices for more than 17 months have resulted in a sharp contraction in government revenues across the GCC, with many countries facing the prospect of economic slowdown and rising fiscal deficits, according to Bank of America Merrill Lynch.
But the degree of impact varies from country to country, the bank added. In the region, the UAE is better positioned to deal with the current situation as it holds substantial reserves and the economy is relatively more diversified than its GCC peers, said Jean-Michel Saliba, Mena (Middle East and North Africa) economist, Bank of America Merrill Lynch.
“In our view, the UAE economy is likely to soft land this year. The near-term direct impact of lower oil prices on UAE is more muted than for GCC peers. However, the indirect impact through lower regional and domestic liquidity, real estate, external sector and indebtedness would be more pronounced if oil prices remain low for long,” said Saliba.
Although the economy is expected to face a slowdown, BofA Merrill Lynch analysts do not expect any drastic cut in government spending the UAE over the short to medium term. With the Dubai government committed to infrastructure developments linked to Expo 2020, they said these investments will continue to support the economic growth in the country.
“In the near-term, Dubai should be able to tackle refinancing challenges. Nevertheless, we expect large Dubai projects to be gradually phased over time. We see strong Dubai government commitment to the timely completion of the Expo 2020. Disciplined fiscal policy remains paramount for Dubai government debt dynamics to take a stabilising sustainable path,” said Saliba.
For the GCC as a whole, BofA Merrill Lynch analysts expect tougher economic environment if the oil price decline is to persist for a longer period.
“In our view, the GCC macro story is likely to have peaked if oil prices stay low for long. We expect twin deficits, as well as weaker real GDP growth and softer non-hydrocarbon sector growth on greater fiscal policy prudence. A prolonged period of low oil prices and regional geopolitical threats remain the primary risks. The realisation of external risks and global risk aversion may cut market access to Dubai Inc, risking a credit event,” he said.
While Saudi Arabia is expected to face softer non-oil GDP growth and slowdown government capital spending, economic activity remains cushioned in the near-term due to continued expansionary fiscal policy and still healthy credit growth. Overall on-budget capital expenditures are likely to be curtailed, although strategic projects appear ring-fenced. This is likely to come at the cost of wide and unsustainable fiscal deficits.
“The absence of material adjustment is likely to imply a need for a sharper adjustment down the line if oil prices remain low for long. Given the rapid forex reserves drawdown, domestic borrowing appears increasingly likely. Despite the increased fiscal strains, we think that Saudi Arabia is unlikely to capitulate on its energy policy,” said Saliba.
Overall, Qatar’s economy is expected to continue outperforming GCC peers, as World Cup capex spending appears set to continue. Qatar’s fiscal and external break even oil price remains among the lowest in the GCC, at $66/bbl and $60bbl respectively.
