Oil slump to cost GCC states $240b in assets

Tuesday, Jun 16, 2015

Dubai: Countries in the Gulf Cooperation Council (GCC) region, including the UAE and Saudi Arabia, stand to lose $240 billion in hard-earned assets in 2015 if oil prices will remain at low levels, or average at $55 per barrel, for the rest of the year, an economist at a local bank said.

GCC governments have been urged to find other sources of revenue amid low oil prices, cut subsidies and budgets, and curtail excessive government spending, to avoid job losses, project cancellations, low bank liquidity and other economic challenges.

Alp Eke, director and senior economist at the National Bank of Abu Dhabi’s (NBAD) economic department, said the biggest loss will be incurred by Saudi Arabia, estimated to be around $160 billion, while the UAE will lose around $55 billion.

Oman and Bahrain are likely to face difficulty, as well, with both expected to sustain fiscal deficits of -13 per cent and -13.5, respectively. They are also forecast to register current account deficits of -17 per cent and -10 per cent, respectively.

“Saudi Arabia and UAE will incur the highest asset depletion. However, in my opinion, UAE is much better prepared. There is a storm going on, but UAE is very well sheltered and the economy is highly diversified and the country does have enough net foreign assets to sustain for a longer duration than others,” Eke told Gulf News.

“Saudi Arabia is the most vulnerable. It has a population of 31 million, close to 11 per cent national unemployment rate. Nearly 80 per cent of the Saudi population is less than 40 years old. All these youth will be in need of education and jobs,” Eke added.

Oil prices have slumped by more than half since September 2014. Prices continued to fall on Thursday, as the US dollar strengthened and the World Bank slashed this year’s growth forecasts for the global and developing economies. The International Monetary Fund (IMF) had earlier projected that GCC earnings from oil and gas exports are likely to drop by about $300 billion due to the steep decline in prices.

During the oil boom, when the price of oil was still very high, billions of dirhams were pumped into the coffers of governments in the Gulf Cooperation Council (GCC) countries. The net foreign assets accumulated as a result, estimated to be around $3 trillion last April, have been gradually diminishing, as revenues from weak oil are falling substantially, while government expenditure has not slowed down.

Data compiled by Saudi Arabia Monetary Agency (Sama) showed that in the case of Saudi Arabia alone, the country’s reserves as of April 2015, at $686 billion, are already almost $60 billion down from August 2014 levels ($746 billion). Saudi government deposits have already started slowing down.

“In the past couple of years due to high level of oil prices, these countries recorded substantial asset accumulation. However, if we assume the oil price were to remain at say $55 for the rest of the year, and no change in planned government spending, GCC nations could experience over $200 billion of depletion in the collective net foreign assets in 2015 alone,” a report from NBAD said.

At current rates, Saudi Arabia has only about six years of assets remaining, but the country’s debt-to-gross domestic product (GDP) ratio is already quite low. “After the assets have been depleted, then KSA has no option but to borrow, and debt to GDP ratio will slowly increase,” said Eke.

Eke noted that while assets are diminishing, government spending remains high. Outgoings in Saudi Arabia, Oman, Bahrain and UAE, in particular, are outstripping revenues. He suggested that subsidies must be reduced, budgets need to be cut and governments should find other ways to make money.

“GCC nations have one of the lowest oil prices in the world. Wasteful and inefficient subsidies must be removed. Such subsidies encourage consumers to be careless and wasteful in usage. Actually, GCC nations have started to make announcements and started to remove them. Qatar has the lowest rate of subsidies in GCC,” Eke pointed out.

Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre Markaz, however, said that, unlike in the past, GCC sovereigns are now in a better position to cope with the decline in oil revenues.

“Most major Mena (Middle East and North Africa) oil exporters are much better positioned to cope with a slump in oil prices today than they were in the 1980s and 1990s. Specifically, Saudi Arabia, the UAE, Kuwait, Qatar and Algeria have ample resources to continue with their current public spending plans,” Mandagolathur told Gulf News.

“The oil price drop would imply a large shift in the GCC’s aggregated fiscal balance from a surplus of 11 per cent in 2013 amounting to $401 billion to a deficit of about 2 per cent in 2015 amounting to $69 billion according to the Institute of International Finance.”

“It is expected that Kuwait, Qatar and UAE will have a fiscal surplus, albeit smaller than the previous years. The lower realization from oil and gas exports alone is estimated at around $300 billion in 2015 for the GCC region [according to the IMF].”

By Cleofe Maceda Senior Web Reporter

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