Dubai: Falling commodity prices, particularly oil prices have adversely impacted leading oil exporters to varying degrees. While some countries such as oil-dependent Venezuela has been dragged down the path of recession and potential debt default, Russia is facing a currency crisis as a direct fallout of oil price decline and Western sanctions.
A monthly survey by Bank of America Merrill Lynch earlier this month showed fund managers increasingly favour the dollar and cash over risky assets and commodities. Money is flooding back into the US as the dollar gains in anticipation of higher interest rates. The greenback has jumped nearly 10 per cent on a trade-weighted basis this year.
Analysts say a stronger dollar, weaker oil and capital-flight pose the biggest threat to Russia. Hard hit by lower oil prices, the rouble lost almost a fifth of its value against the dollar.
On the one hand, leading oil importing emerging markets are seen to gain on their balance of payment and currency account positions from the decline in oil prices but many are facing the prospect of capital flight in the context of a rising dollar and fund managers moving assets to less risky options such as the US treasuries.
Bloomberg data showed that earlier this month investors withdrew more than $2.5 billion (Dh9.2 billion) from US exchange-traded funds that buy emerging-market stocks and bonds.
Despite a 50 per cent decline in crude prices from the second half of this year, there is consensus among economists that the Gulf Cooperation Council (GCC) countries do not face any immediate threat of an economic crisis.
“There is no reason to 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.
Fiscal deficits
Analysts say GCC countries that benefited from higher oil prices from 2011 to 2014 have accumulated substantial surpluses and these will come handy in dealing with the current level of oil prices. “I don’t think there will be a need for drastic fiscal adjustments in GCC countries to deal with lower oil prices and reduced surpluses,” said Abdullah Al Badri, Secretary General of Opec (Organisation of the Petroleum Exporting Countries).
But some analysts say resilience is relative even among exporters some of which have accumulated surpluses and strong external balances, while some of them are already facing fiscal deficits.
Credit rating agency Moody’s say that while GCC can withstand the pressure of oil prices averaging around Moody’s estimate of $80 to $85 a barrel in 2015, Bahrain and Oman’s credit profiles will be the most adversely affected, because these two countries exhibit a combination of high fiscal break-even oil prices and low reserve buffers.
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 states 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. 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 Malek, 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. Moody’s expects that Saudi Arabia’s fiscal balance will turn into a deficit in 2015, and Bahrain and Oman’s deficits will widen significantly to above 7 per cent of their respective GDP. All GCC countries except Oman should show current account surpluses in 2015.
