Dubai: The sharp fall in the oil price and the outlook for a price war are significant downside risks to the economic outlooks of the Gulf countries.
The oil price war Saudi Arabia launched against Russia over the weekend sent crude prices into one of the steepest falls in history. Analysts expect sustained low oil prices will have serious consequences for GCC economies.
Fiscal deficits loom
“We estimate all GCC countries will realise a significant fiscal deficit at the current oil price level, with Oman and Saudi Arabia seeing particularly significant shortfalls relative to GDP (double-digit in percentage of GDP terms),” said Thirumalai Nagesh, an economist at Abu Dhabi Commercial Bank.
The rise in regional non-oil economic activity from 2017 was underpinned by the strengthening in oil prices, which in turn was supported by the Opec+ agreement and production cuts.
The outcome of the latest Opec meeting has come as a big jolt to the oil markets, which was already impacted by a demand slowdown resulting from the outbreak of coronavirus (COVID-19) across most oil importing countries.
“We mark-to-market our entire quarterly 2020 oil price forecasts, reflecting the two highly uncertain simultaneous bearish shocks – a demand destruction caused by COVID-19 and a supply surge caused by the unequivocal oil price war instigated over the weekend by Opec and Russia,” said Ehsan Khoman, head of Mena research and strategy at MUFG. MUFG econometric models now assume quarter end levels for the four quarters this year at $28.6/b, $32.3/b, $35.6/b and $46.1/b, respectively.
“Specifically in Q2-2020, we do not rule out a protracted period of oil prices at operational pressure levels of below $30/b,” said Khoman.
Decline in prices resulting from a glut in supply and low demand from key oil buyers are expected to result in fiscal shortfall across GCC countries, while importers are expected to benefit.
“Overall, at these prices, many oil producers can be expected to face recessionary conditions. On the other hand, oil importers will of course benefit, even at lower levels of demand,” said Marie Owens Thomsen, Global Chief Economist, Indosuez Wealth Management.
According to ADCB economists, if Brent crude averages $35 p/b, they estimate that Saudi Arabia would see a fiscal deficit of around 14.6 per cent of GDP, whilst Oman’s shortfall would be over 16 per cent of GDP.
The fall in revenue will require a meaningful pull-back in government spending, as was the case in 2015 and 2016, to limit the size of the fiscal deficit. Oman would have the most immediate need to reduce its government spending given its already tight fiscal position.
“Saudi Arabia does have some fiscal space to maintain its spending plan for six months to conceivably a year, though will not be able to avoid an adjustment if oil remains below the $50 p/b level," said Monica Malik, Chief Economist of ADCB.
The UAE, Kuwait and Qatar have deeper fiscal buffers in place to navigate the oil price weakness, though are unlikely to want to see sustained large deficits.
“The key issue remains the length of the oil price war," said Malik. "Domestic liquidity in the regional banking systems is likely to tighten as governments’ borrowing requirements increase. Moreover, the cost of raising debt internationally is also expected to rise with the deteriorating fiscal and current account positions.”
While analysts expect GCC currencies to remain stable and pegged to the dollar, speculation against these currencies are expected to rise in a sustained low oil price environment.
Any retrenchment in government spending will likely lead to a marked softening in nonoil activity alongside weakness in key external sectors (trade, tourism, logistics, etc.) as a result of COVID-19.
“Historically in such cases, GCC countries have tended to initially cut back on their capital spending rather than their current expenditure. However, sustained downwards pressure on oil price would require a meaningful retrenchment in current spending,” said Nagesh.