Precarious Outlook: MENA oil exporters' revenues to head south

For oil-importing countries, the drop in revenues could reach double-digits

  
Pump jacks operate at sunset in Midland, Texas, U.S., February 11, 2019. Image used for illustrator purpose

Pump jacks operate at sunset in Midland, Texas, U.S., February 11, 2019. Image used for illustrator purpose

REUTERS/Nick Oxford

Oil-exporting countries in the Middle East and North Africa will lose around $224 billion (Dh822.1 billion) in revenues this year due to a fall in oil prices and the impact of Covid-19, which is $46 billion (Dh169 billion) less than what was expected in July, the International Monetary Fund (IMF) said on Monday.

"Fiscal revenues in the region have declined sharply due to lockdown and oil price shock. For instance, oil exporters are expected to experience a $224 billion shortfall in revenues this year. Some countries will incur the highest deficit in 20 years and, in turn, high deficit will raise burden and erode fiscal space in some countries. The pandemic has heightened corporate default rate risk and credit risk for banks in the region with potential losses that could amount to five per cent of GDP," said Jihad Azour, director of the IMF's Middle East and Central Asia Department.

He said with uncertainty surrounding the pandemic's trajectory and scale of the challenges it has created, countries in the region continue to face a difficult economic environment.

The IMF believes oil exporters in the Middle East, North Africa, Afghanistan and Pakistan (Menaap) region will see a 6.6 per cent contraction in 2020, reflecting the combined impact of the decline in oil prices and production cuts and lockdowns. In oil-importing countries, the benefit of lower oil prices is being mostly offset by hampered growth in trade, tourism and remittances. The fund sees -1 per cent growth in the region's oil importers.

"The pandemic may inflict deeper and more persistent economic scarring than previous recessions, given severe vulnerabilities and its unprecedented nature. It is estimated that the output in the region would return to trend only after a decade," Azour said at the launch of the IMF's regional outlook report.

He stressed that if these issues remain unaddressed, these developments could threaten financial stability and efforts for great financial inclusion.

Regional countries with fiscal space should consider implementing broader stimulus packages to lift demand and exit emergency support gradually to avoid sudden income losses. While countries with more limited spaces should focus on reallocation expenditures to health, education and critically-needed social programmes while working to cut inefficient spending and increase tax progressively, Azour added.

For oil-importing countries, the drop in revenues could reach double-digits due to the impact on tourism, service industry and a fall in remittances. "So it is important for them to keep the policies of the economy protecting from the scars of the pandemic and quickly prepare for a recovery."

Impacted by the double-whammy of the oil price shock and the pandemic, the GCC region could shrink by about six per cent in 2020 and recover next year.

"Drop in growth is because oil prices this year will average $42 to $45, with the potential to increase after 2021. Oil production has been limited under the Opec+ agreement while non-oil sectors like tourism and logistics have been affected by pandemic," he added.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, on Monday said given the rising demand-side concerns, they have modestly revised down its 2020 Brent crude forecast to $42.9 per barrel from $43.80, though they retained a 2021 projection of $50.7 a barrel.

"Opec+ production cuts and improved demand during the summer have been critical in rebalancing the oil market from a flows perspective in the third quarter of 2020. However, the large inventory glut created in the first half of 2020 will take time to normalise to pre-Covid-19 levels," said Malik.

 

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