Gulf countries may see an impact on their fiscal balances and growth from the drop in Brent crude oil prices and the possibility of production cuts later in 2015, a new report has shown.
According to Standard Chartered bank, “positive signals” are seen in Mena (Middle East and North Africa) economies that have gone through political transitions, and are now undergoing economic transitions and implementing the right economic reforms.
“We see three important themes for the region in 2015. First, the growth dynamics of the major oil exporters will be adversely affected, while we see positive growth signals from some oil importers that have implemented reforms and are benefiting from investment inflows. Second, as recent oil-price moves have shown, fiscal spending that is heavily dependent on the hydrocarbon sector cannot rise indefinitely. Finally, reducing high energy subsidies in the Mena region may be crucial to giving economies the fiscal leeway needed to meet growing investment needs,” StanChart said.
“The growth outlook for the major oil exporters in 2015 looks challenging. Fiscal policy is likely to be tightened as oil prices fall, and this will affect non-hydrocarbon growth. Further, we expect oil output cuts to be required later in 2015, which will reduce headline GDP growth,” the bank said in recent global economic outlook.
In the wider Mena region, reforms implemented in Jordan and Egypt are leading to an “improved outlook” for 2015. Both countries have made significant efforts to reform energy subsidies under tense domestic conditions. This is now paying off. Egypt has benefited from direct investments from the UAE and Saudi Arabia. The bank expects other Mena countries to benefit from similar investment flows in 2015 and beyond.
The report also said the GCC (Gulf Cooperation Council) credit markets have reacted little so far to the sharp drop in oil prices. The bank attributes this resilience to the strong local bid, which continues to anchor spreads; and the fact that international investors still view the region as defensive, particularly in the context of the fundamental challenges facing other emerging-market regions such as Central and Eastern Europe and Latin America.
StanChart thinks the region remains vulnerable to a correction the longer oil prices remain at current levels, for the following reasons. First, the spread cushion is limited, with many credits trading at or close to their all-time tights. Second, most credits in this space are quasi-sovereigns, and oil remains the region’s primary credit driver. Pressure on sovereigns’ revenue streams (and their perceived ability to support quasi-sovereign credits) could lead to a re-pricing of credit risk.
Third, lower liquidity in the banking system could affect the local bid. And lastly, international investors might consider diverting their investments to countries/regions that benefit from low oil prices. Longer-dated bonds are vulnerable given higher international investor participation, StanChart said.
