GCC ‘relatively upbeat’ despite oil price plunge
Gulf states, which have based their budgets on an oil price of $80 a barrel or less, are likely to remain relatively sanguine about current oil market conditions, say Saudi-based economists and analysts.
Their assessment follows International Monetary Fund chief Christine Lagarde’s recent warning that Gulf states would face budget shortfalls if the recent decline in oil prices persists.
“A sustained decline of $25 a barrel in the oil price would reduce the revenues of most Gulf countries by eight percent of gross domestic product, and put many of them into a fiscal deficit situation,” Lagarde told reporters on the sidelines of a conference in Kuwait City.
The benchmark US oil price has fallen to levels not seen since mid-2012, while in London Brent North Sea crude is around a four-year low.
The price of US West Texas Intermediate (WTI) stood at around $81 a barrel on Friday while Brent was changing hands for about $86.
Reacting to Lagarde’s remarks, John Sfakianakis of Ashmore Group commented: “Saudi Arabia alone is sitting on foreign reserves which are nearly equal to the size of the country’s entire economy. And unlike most of the developed economies where debt is a structural problem, Saudi Arabia has the second lowest debt to GDP ratio in the world.”
Basil Al-Ghalayini, CEO of BMG Financial Group, said: “If the oil prices continue to decline, the impact on the Saudi budget could be noticeable. If that happens, future budgets will be adjusted but I do not expect the Saudi government to cut down its spending on medium-term infrastructure projects.”
He added: “As for the stock market, usually, oil prices and geopolitical risk are the global factors which do influence traders and investors’ sentiments in Saudi Arabia and the GCC region. Having said that, the fundamentals of the leading companies in Tadawul are still strong.”
Saudi Arabia’s Tadawul All-Share Index rose 1.5 percent on Sunday even as shares in Saudi Basic Industries Corp. (SABIC) fell on disappointing third-quarter results.
Other stocks more than offset SABIC’s decline. The Banking and Financial Services index rose 2.25 percent.
Oil prices have fallen by a quarter since June as excess supply and weaker demand create a glut on world markets.
Speaking on current oil market conditions, Sfakianakis added: “What is happening today is healthy for both oil producers and oil consumers. For the oil producers it’s healthy to re-prioritize and apply some fiscal restraint, but always mindful of the infrastructure needs that produce over time higher output multipliers for regional economies.”
He said: “For consumers, lower oil prices should be well-received as there are direct recovery benefits for many developed and emerging economies.”
But Sfakianakis acknowledged that “there is always concern when a country’s total revenues depend almost exclusively on one source which in the case of the Gulf economies is oil. Having said this, most of the Gulf economies have substantial fiscal buffers to support sensible spending for sometime.”
The macro fiscal picture of the Gulf economies today is far better than a decade ago when oil was beginning its upward trend, he pointed out.
Ole Sloth Hansen, head of Commodity Strategy at Saxo Bank, said crude oil finally managed to stabilize after its pounding in previous weeks. But not before WTI crude oil once again tested the $80 a barrel level after another strong weekly inventory report from the US.