MANAMA: Low oil prices, driven by weaker demand, increased supply and a more powerful US dollar, posing significant challenges to GCC markets, according to the findings of a new report by ICAEW.
The latest Economic Insight report warns the impact of continued oil price weakness could put considerable pressure on GCC economies and affect real GDP growth, unless they step up diversification of their economies.
Commissioned by ICAEW, the report provides its 142,000 members with a current snapshot of the region’s economic performance. The report undertakes a quarterly review of the Middle East, focusing on the Gulf Cooperation Council (GCC) member countries (United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5).
With substantial dependency on commodity exports, GCC economies are expected to face major implications from a decline in oil prices. According to the International Monetary Fund, the projected 2015 breakeven prices, at which oil must sell in order to balance the budget, put Bahrain and Oman under the greatest pressure at US$116 and US$108 per barrel respectively. Saudi Arabia, Qatar, UAE and Kuwait are better placed, thanks to large and mature domestic banking systems, access to international markets and large sovereign wealth funds generating ample investment income.
A cut in production levels could be considered in response to falling prices, as done in the past by Saudi Arabia. However, the spending plans suggested by the breakeven prices imply that most GCC hydrocarbon exporters do not have the flexibility to endure sustained reductions in either output or revenues.
“Weakening oil prices show how vital it is to grow economies away from total dependence on commodities. By continuing to focus on further diversifying economies, it will help to ensure sustainable economic growth and stability,” Michael Armstrong, ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said.
Latest projections for 2016 government net borrowing in GCC countries show Kuwait, UAE and Qatar with the highest surpluses; 24.1%, 9.8% and 6.6% of their respective annual GDP. Bahrain is the only GCC country with a current fiscal deficit of 4.8%, although Oman’s government net borrowing is forecast to reach 1.8% of GDP in 2016.
Although government spending plans are substantial, they are not necessarily unsustainable. Ambitious plans for investment and infrastructure building across the region should stimulate growth in the short term, and could also raise long-term productivity. Also there is good news in increased demand from emerging markets, particularly in the ASEAN region.
Saudi Arabia’s output contracted by 3.1% during Q2, partly thanks to falling exports and tighter government spending. Weakened export earnings are likely to drag on GDP over the coming years, with annual growth slowing from 4.2% this year to 3.9% in 2016. However, more dramatic deceleration is unlikely, given the Kingdom’s commitment to stable growth, and realistic plans for medium-term fiscal expansion.
The UAE’s annual GDP growth is likely to be 4.6% in 2014, slowing marginally to 4.4% in 2015. The Emirates’ progress in diversifying away from oil means it should be relatively protected from the worst impacts of falling oil prices. However, recent downturns in equity markets – with Dubai’s property index down over 15% since September – underline risks to this outlook.
Qatari GDP contracted during Q2, with strong growth in non-oil sectors only partly offsetting a slowdown in the hydrocarbon sector. Annual growth is expected to be 6.3% this year, rising to 7.2% in 2015, assuming announced infrastructure projects proceed as planned. Growth is expected across construction, financial and business services, and tourism. Intensive capital investment should buttress GDP expansion across the medium term.
Oman’s hydrocarbons production has been sluggish, leading to annual growth slowing to an estimated 3.3% during 2014. Owing in part to lower-than-expected oil prices, GDP growth is not likely to improve markedly in the short term. Longer-term outlooks are brighter, with new gas fields expected to begin production and developments in downstream and non-oil activities boosting output.
Bahrain’s output should expand by 4% over 2014. However growth is expected to slow, to an average of 3.5% over 2015-16, thanks to flat oil production, and weaker growth in non-oil activities.
Kuwait’s oil production has fallen short of projections, and GDP growth has been lower than expected. Strong increases in private sector credit indicate the non-oil sector has offset some of this weakness, however, GDP is estimated to have grown by 1.7% this year, accelerating to 2.5% next year.