Domestic, regional fallouts from falling oil revenues
Beirut - Crude oil prices witnessed a record decline in 2015, forcing oil-rich Arab Gulf states to anticipate budget deficits for the first time in years and consider economic reforms. Financial resources to sustain planned domestic spending seem available for a few years but aid promised to net oil importers in the Middle East and North Africa seems at risk.
In its regional economic outlook for the Middle East, North Africa and Central Asia, published in October, the International Monetary Fund (IMF) forecast that the Gulf Cooperation Council (GCC) will see gross domestic product (GDP) growth slow from 3.25% in 2015 to 2.75% in 2016.
With crude prices falling from more than $115 a barrel in June 2014 to less than $40 in December 2015, “fiscal revenues by GCC states slumped and their aid to recipient Arab states is likely to be affected”, Abdel-Latif al-Hamad, general manager of the Arab Fund for Economic and Social Development, said in November.
GCC members’ average fiscal deficits were expected to reach 13% of GDP in 2015, with the region’s largest economy, Saudi Arabia, facing a deficit of 21.6% in 2015 and 19.4% in 2016, the IMF said. All regional oil exporters, having lost $360 billion over the past year in export revenues, will have to deal with a cumulative fiscal deficit of more than $1 trillion over the next five years.
Saudi Arabia said the 2015 budget deficit amounted to $98 billion as lower oil prices cut into the government’s main source of revenue, prompting the kingdom to scale back spending for the coming year and hike petrol prices.
So far, methods to finance the anticipated deficits are there, at least for a few years, Amer Thiab al-Tamimi, a Kuwaiti economist, told The Arab Weekly.
“There is talk about borrowing from financial markets through Treasury bills and banks in the region and elsewhere are ready to lend to GCC states at low interest rates thanks to the availability of money in the banks,” he said.
While borrowing is not new to GCC states, having borrowed in the 1980s when oil prices were low, another option is to draw on huge surpluses accumulated while crude prices shot up in recent years. “However, streamlining spending and introducing reforms — actually, a new economic philosophy — will be inevitable if crude prices remain this low or slump further,” Tamimi said.
In December, Moody’s lowered its price assumption in 2016 for Brent crude oil, the international benchmark, to $43 from $53 per barrel, and for West Texas Intermediate (WTI) crude, the North American benchmark, to $40 from $48 per barrel. Looking further ahead, the ratings agency expected both Brent and WTI prices to rise $5 per barrel in 2017 and 2018.
Those prices, compared to Moody’s assumptions a month earlier, seem very different from current levels, however. In the middle of December, WTI traded at $36.22 and Brent crude at $37.75. Oil prices have been battered by a glut in global supply, mainly caused by record production by Organisation of the Petroleum Exporting Countries (OPEC) members and demand failing to keep up.
In October, the United Arab Emirates became the first GCC member to remove transport fuel subsidies. Oman, like Saudi Arabia, in late December, raised petrol prices. Bahrain, which hiked food prices in December, Kuwait and Qatar said they were considering similar moves.
“This is the best time to do it as prices are already low, hence, people will accept it without much complaint,” a GCC source told The Arab Weekly. He would not comment on whether a hike in retail costs due to a rise in crude prices would upset the population.
Two months later, GCC states agreed on key issues regarding the implementation of value-added tax in the region but are still in talks about finalising and unifying the process. “Such a move would be a major reform but, if coupled with lower government spending, there will be much slower growth,” Tamimi said.
“Here is where the change of economic philosophy is needed. A shift from rentier economies to true free market economies should be launched sooner than later.
Citizens need to pay for the services they get and the private sector should be allowed to play the role of growth’s key driver instead of government spending.”
Egypt, a key recipient of GCC support, is resorting to borrowing despite pledges by GCC states that their support will not waver. “In the worst-case scenario, there will be a little less aid to Egypt but no aid or much less aid is out of the question,” the GCC source said. GCC aid to other net oil importers in the region, such as Lebanon and Jordan, “is not that of a burden to donors to begin with”, the source said.
Since 2013, Egypt received $20 billion in aid development projects and central bank deposits from Saudi Arabia, the UAE and Kuwait. In December Saudi King Salman bin Abdulaziz Al Saud ordered the kingdom to help meet Egypt’s petroleum needs for the next five years and that Saudi investments in this country be more than $8 billion.