Analysis: Sliding oil price rebalances Middle East economy
By Andrew Torchia
DUBAI (Reuters) – Ziad Makhzoumi, chief financial officer of Arabtec ARTC.DU, the United Arab Emirates’ biggest construction firm by stock market value, thinks the region’s economy will probably ride out weak oil prices comfortably. But he sees a risk.
If oil drops below the price at which energy-exporting countries in the Gulf can balance their state budgets – a scenario which he thinks unlikely – infrastructure and other building projects will slow down or in some cases halt.
Fortunately, “governments are more prudent and forecast better now than they did many decades ago, and can juggle things to maximize the use of limited funds or make their cash go longer,” Makhzoumi told Reuters.
Across the Middle East, executives like Makhzoumi are wrestling with the implications of the plunge in oil prices over the last several weeks. If the lower prices are sustained, or if oil falls further, it could be the most significant event for some economies since last year’s Arab Spring uprisings.
Cheaper oil may boost growth in some of the weakest states while cooling it in the booming Gulf energy exporters. There could be political as well as economic implications: some nations engulfed by the Arab Spring, such as Egypt, may find it easier to regain social stability. It may become harder for Iran to defy international sanctions designed to curb its disputed nuclear program.
Overall, said Liz Martins, senior economist for the Middle East and North Africa at HSBC in Dubai, the oil price drop could be good for the region, “by bringing the cost of oil down to a level which is more sustainable for everyone in the long term.”
NORTH AFRICA
After averaging nearly $120 in the first quarter of this year, Brent crude oil has slipped as low as $95 a barrel this month – the lowest level since January 2011 – because of loose supplies and signs the global economy is slowing. A further slide is possible; the Organization of the Petroleum Exporting Countries (OPEC) said on Tuesday that the supply-demand balance could weaken more in the second half of 2012.
That is good news for the North African energy importers, Egypt, Tunisia and Morocco, which have close links to Europe and are therefore vulnerable to shrinking foreign trade and lower remittances from their overseas workers as the euro zone debt crisis worsens.
Egypt, which exports natural gas, looks likely to benefit relatively little from cheaper energy prices; its oil import bill was under 3 percent of its gross domestic product last year, according to the International Monetary Fund. Morocco, where the ratio was above 10 percent, could get a big boost.
Assuming an oil price averaging $115 per barrel this year, the IMF has forecast Morocco’s GDP growth will slow to 3.7 percent in 2012 from 4.3 percent in 2011. If oil instead averages $100, that might by itself add roughly 1 percentage point to growth – at least offsetting the impact of a deeper European recession.
But the benefits of cheaper oil to North Africa go beyond growth rates. Rising oil prices have been increasing the cost of fertilizers and therefore the cost of food, fuelling the social discontent which triggered the Arab Spring; governments have damaged their finances by paying heavy subsidies to keep fuel prices down for consumers.
In Egypt, the government has said budget allocations to keep down retail prices of petroleum products are due to increase over 25 percent to 120 billion Egyptian pounds ($20 billion) in the fiscal year starting on July 1.
A saving of just 10 percent due to lower global oil prices could reduce Egypt’s budget deficit, estimated by the IMF at 9.8 percent of GDP this year, by nearly 1 percentage point – not enough by itself to solve the country’s financial problems, but an improvement which its jittery bond market would welcome.
GULF
In the Gulf, the oil price slide threatens to cool an 18-month economic boom that helped the region recover from the global financial crisis of 2008-2009. In addition to receiving lower oil prices, Gulf oil producers – particularly Saudi Arabia – may have to cut the volumes they sell to prevent a deeper drop of prices.
So far, however, most Gulf economies look likely to continue expanding at comfortable rates with cheaper oil. In the wake of the recent slide in the price, the UAE’s economy minister Sultan bin Saeed al-Mansouri last week cut his forecast for this year’s GDP growth to around 3 percent, from the almost 4 percent which he predicted in March.
Any further drop in the oil price, if sustained, could slow growth further. But Gulf economies would probably remain far from recession. Last year, as Saudi Arabia produced 9.3 million barrels of oil per day with the Brent crude price hovering around $110, its GDP grew 6.8 percent; in 2010, with production at just 8.4 million bpd and Brent around $80, it still managed growth of 4.6 percent.
The key for the Gulf economies is preventing the oil price from dropping below their “break-even” prices, the levels at which they can balance their budgets. While they remain in the black, governments can boost spending on infrastructure and social welfare if needed to keep their economies humming.
With the exception of Bahrain, which can count on financial support from Saudi Arabia, all of the six wealthy Gulf exporters are still far from going into the red. The UAE’s break-even price is about $86 per barrel, and the key level is $76 for Saudi Arabia, according to the average estimates in a Reuters poll of analysts in March.
“As long as Brent crude prices remain above $70 per barrel, most Gulf countries will have no trouble funding their fiscal expansion,” said Said Hirsh, Middle East economist at Capital Economics in London.
Martins said HSBC economists originally projected Saudi Arabia could break even on its budget at an average oil price of $90 and production of 9.4 million bpd over this year. So far this year, however, it has been producing about 10 million bpd.
This suggests that even if Riyadh now cuts output by 2 million bpd as part of efforts to support the oil price near $100, the impact on its finances for the rest of 2012 will be relatively small, she said. Furthermore, the Saudi central bank’s huge foreign reserves of over $500 billion mean it could continue spending heavily for some time even if the government did fall into deficit.
“They could theoretically carry on spending at current levels for another 2-1/2 years without pumping another barrel of oil,” Martins said.
Other Gulf countries also have substantial financial reserves, although Bahrain and Oman would be at risk from a prolonged fall of oil prices, Hirsh at Capital Economics said.
IRAN
One of the economies damaged most seriously by the oil price drop may be Iran – a prospect that may not displease the Gulf Arab states, which are geopolitical rivals of Tehran and worry about its nuclear program.
The IMF projected in April that Iran’s GDP would grow just 0.4 percent this year while its oil production would shrink to 3.6 million bpd from last year’s 4.1 million bpd, as the country grapples with sanctions that are hurting its foreign trade. The government is expected to run a budget deficit of 0.3 percent of GDP, the IMF said.
Those projections were based on the oil price averaging $115 in 2012. If it instead averages $100, that could lop some $9 billion off the value of Iran’s oil exports, equivalent to almost 2 percent of GDP – enough to push the economy into recession and multiply the budget deficit severalfold.
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