The local image of oil policy in the GCC

10/01/2016 17:24 AST

Crude oil receives significant attention across global financial markets because fluctuations in prices directly affect world economies. Oil prices averaged over $90 (Dh330.3) per barrel in international markets from 2011 until 2014, however, in 2015 prices have averaged less than $50 per barrel.

Consequently, revenues for GCC countries are forecasted to shrink by 30 per cent-40 per cent for the remainder of 2015. The economic outlook of GCC countries is shaped by supply and demand of oil in global markets.

Most analysts agree that the slowdown in global economic growth and higher oil output from other regions will limit price gains and result in marginal revenue forecasts over the next five years.



Impact on international trade

GCC countries generally have significant export surpluses from high external trade due to oil transactions. However, it’s uncertain if oil demand will remain steady given the challenges posed by non-conventional energy resources such as wind, solar, geothermal and shale. Focus would shift to maintaining market share rather than generating high revenues, and GCC countries will continue to explore petrochemicals exports.



Impact on fiscal policy

Long-term fiscal targets should be minimising budget deficits while maintaining foreign reserves. GCC economies will eventually have to diversify into non-oil based revenue. An immediate measure could be diversifying exports into petrochemicals, materials and services. Current expenditures typically arise from government wage bills, defence, healthcare, education and subsidies. Declining revenues will have a negative impact on national budgets, which is why most countries have started to cut or remove subsidies.



Impact on monetary policy

Local monetary policies are vital in balancing the budget. The region is expected to continue its currency peg against the US dollar, however interest rates and yields might significantly go up for two reasons. Firstly to counterbalance the inflation resulting from fiscal consolidation and secondly to attract liquidity and investment in light of potential rating downgrades.

Per forecasts by the International Monetary Fund, inflation is expected to increase across all GCC countries in a controlled manner.

Deposit rates offered by banks have increased in 2015 and this trend is expected to continue, mainly reflecting the recent and further possible rating downgrades. It is essential for GCC governments to maintain disciplined debt levels as a percentage of GDP. Standard & Poor’s recently downgraded Saudi Arabia’s credit rating to A+ and Bahrain to BBB-. The five year credit default spread (CDS), an indicator of sovereign default risk for Bahrain, is moving upward to 358 basis points (bps), possibly due to a high debt/GDP ratio and the recent impact which oil prices have had on the budget. Saudi Arabia is the only other country in the GCC with high a 5 year CDS of 141 bps.

Most GCC countries follow two approaches in diversifying their economies to reduce reliance on oil. One is to acquire cheap assets globally due to pricing anomalies and capitalise on strong FX reserves. The second is developing a strong non-oil sector.

GCC countries also have a clear advantage in petrochemical industries that are dependent on oil and gas; like aluminium extrusion, steel, cement etc. One way to benefit is by charging a variable rate on gas and other petrochemical products. Profit participation could be a smart way to sell gas at a higher price. GCC countries can move away from commodity dependence to petroleum products and by-products.

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