The recent sharp fall in oil prices and significant volatility in capital markets are not likely to impact the economic growth prospects of Gulf Cooperation Council (GCC) countries according to the Institute of International Finance (IIF), a Washington based global association or trade group of financial institutions.
While large foreign exchange assets underpin the dollar peg regime in the GCC, the region has been subject to volatility in asset prices, with the MSCI GCC index still down more than 20 per cent from its peak despite paring back some losses.
“The GCC countries are much better positioned to cope with a slump in oil prices today than they were in the 1980s and 1990s. Ample public foreign assets and low debt in most of these countries will mitigate the adverse impact of low oil prices on economic activity and allow continued robust public spending, particularly on infrastructure,” said Garbis Iradian, Deputy Director of IIF.
In light of the decision by major oil producers in Opec to discount prices rather than cut back their own output in the face of surging global supply, GCC oil production is expected to remain flat in 2015.
“We estimate that, on average, the fiscal break even oil price for GCC countries is $82/bbl for 2014 to balance their budgets. This is slightly higher than the IIF baseline forecast of $78/bbl for 2015, which assumes that oil markets tighten as the year progresses,” said Giyas Gokkent, senior economist at IIF.
The drop in oil prices is projected to reduce hydrocarbon export receipts from a peak of $743 billion in 2012 to about $410 billion in 2015, leading to weaker current account positions and substantial pressures on fiscal accounts, including a fiscal deficit of 8.9 per cent of GDP in Saudi Arabia, in the absence of adjustment. Non-oil growth is expected to moderate to 4.7 per cent in 2015 from 5.6 per cent in 2014, driven by growth in government spending, albeit at a lower pace than previous years, and strong noil private sector activity.
While many oil exporters’ currencies are depreciating, there is no significant pressure on GCC’s dollar pegged currencies. The peg has served the GCC economies well in supporting macroeconomic stability and private sector confidence.
IIF expects the impact of low oil prices on non-hydrocarbon growth will greatly depend on the policy response of the governments in the region. “We expect continued growth in government spending (particularly on infrastructure), but at a somewhat slower pace than in recent years. This would help limit the impact on non-hydrocarbon growth, which could moderate from 5.6 per cent in 2014 to 4.7 per cent in 2015,” said Iradian.
With flat oil production overall GCC growth in 2015 is projected at 3.4 per cent, as compared with 4.1 per cent in 2014. The aggregated fiscal balance will shift from a surplus of 4.8 per cent of GDP in 2014 to a deficit of 2.1 per cent in 2015. While the fiscal deficit in Saudi Arabia will be large, at 9 per cent of GDP, the fiscal balances in the UAE, Kuwait, and Qatar would still remain in surplus, albeit much smaller than previous years.
Due to pegged exchange rate regimes, the modest increase in interest rates in the US beyond the first half of 2015 will result in higher domestic interest rates; however, the pass-through of policy rates to lending rates is generally weak in the GCC countries, and the impact of rising interest rates is likely to be limited. Inflation is expected to remain subdued, slightly less than 3 per cent, as food and nonfuel commodity prices decline further in 2015.