Oil Collapse Will Hit the Gulf, but Don’t Panic
YASSER AL-ZAYYAT | AFP | Getty Images
The economies of Gulf oil exporting nations look increasingly strained, new forecasts show, but economists say there’s still no cause for alarm.
The fiscal balances of Gulf Cooperation Council (GCC) oil exporting nations will hit a deficit of 7.7 percent of gross domestic product (GDP) in 2015 following a 50 percent decline in Brent crude prices over the past twelve months, a report by the Institute of International Finance (IIF) released over the weekend said. That’s down from double-digit surpluses in recent years.
Saudi Arabia – the world’s largest producer – is set to post a current account deficit for the first time in a decade this year, the report said. Meanwhile the United Arab Emirates – the world’s eighth largest producer – will shift to a fiscal deficit of 4.3 percent of GDP, from a surplus of 6.7 percent last year.
Moody’s Investor Services expressed similar concerns in a recent report: “Large net oil-exporting countries such as Oman, Bahrain and Saudi Arabia will likely record the largest deterioration in both fiscal and external metrics this year, moving from large twin surpluses to twin deficits.”
Why you shouldn’t worry
Despite dire economic forecasts, experts remain positive about future prospects for the Gulf.
“For the short term, ample public foreign assets and low debt in GCC countries will mitigate the adverse impact of low oil prices on economic activity and allow public spending to continue growing, albeit at a lower pace than in recent years,” the IIF said.
The IIF doesn’t expect cheaper oil to spark government spending cuts, citing strong buffers. The region’s gross public external assets are estimated at about $2.2 trillion, while gross government debt is only around 13 percent of GDP.
Even in the worst-case scenario for Saudi Arabia, Moody’s envisions government reserves falling to $617 billion from $734 billion currently. “But even this reduction in buffers would still be more than sufficient to cover another large deficit in a further year of low oil prices,” Moody’s said.
No currency troubles
The U.S. dollar’s rally in recent sessions has had little impact on the currencies of Gulf countries, compared to other major oil-producing nations.
In the past 30 days, the U.S. dollar index has gained over 6 percent while the Saudi Arabian riyal, U.A.E. dirham and Bahraini dinar are all flat. On the other hand, Russia’s ruble and the Nigerian naira have both lost 2 percent.
All GCC nations with the exception of Kuwait have their currencies pegged to the U.S. dollar, and despite oil’s slide, most central bank chiefs have repeatedly said they are in no hurry to change the dollar peg.
“The currencies of commodity-dependent economies typically come under depreciation pressures with falling commodity prices,” Moody’s said.
“However, the GCC countries’ very large hard-currency reserves have so far allowed them to fend off nominal depreciation pressures stemming from oil price volatility, notwithstanding their currencies’ peg to the U.S. dollar.”