Page 11 - MEOG Week 12

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UAE best-positioned in GCC to absorb oil shock
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THE UAE is best-positioned among Gulf Co-operation Council (GCC) economies to weather the decline in oil prices, as it can finance its current account deficit longer than any of its regional peers, says a new report.
According to Capital Economics, the UAE can finance its current account deficit for 35 years if oil prices stay at $25 per barrel. Kuwait comes second, followed by Qatar, Saudi Arabia, Bahrain and Oman.
“In the four largest Gulf economies - Saudi Arabia, the UAE, Kuwait and Qatar - current account deficits could be financed through a drawdown of large foreign exchange savings for a considerable amount of time. Saudi Ara- bia could do so for around a decade and the other three countries for even longer,” said Jason Tuvey, senior emerging markets economist at Capital Economics. The report said the UAE still runs a current account surplus at $30 per barrel.
Brent crude was trading down $3.37, or 12%, at $26.10 per barrel on Monday after dropping as low as $25.23, its weakest since 2003.
Data showed that UAE-based sovereign wealth funds held over $1.21tn worth of assets in August 2019 compared with $825.76bn by Saudi Arabia, $592bn by Kuwait, $320bn by Qatar and $22.14bn by Kuwait.
Oil prices have plummeted during the last fewweeks,firstduetocoronavirus(COVID-19) and then the collapse of OPEC+ talks on pro- duction cuts. Brent has dropped 55% in the past month from $57.60 per barrel on February 17 to $26.10 on March 21.
Tuvey noted that large foreign exchange sav- ings provide substantial buffers and the likes of Bahrain and Oman, which are most vulnerable to a period of low oil prices, can probably rely on financial support from their neighbours to avert devaluations.
He said dollar pegs in Bahrain and Oman are more vulnerable, with foreign exchange savings only able to cover current account shortfalls for a couple of years at most. Bahrain secured a $10bn financing package from its neighbours in mid-2018.
In recent days, GCC governments have stepped up fiscal support in order to mitigate the economic hit from efforts to contain the virus. “If oil prices stay low even after the virus fears have subsided, austerity will come on to the agenda and this means that an eventual recovery in non- oil sectors will be slow-going,” he said.
Khatija Haque, head of MENA research at Emirates NBD, said that the UAE posted a budget surplus of AED37bn ($10bn) in 2019 and is well-positioned to withstand lower oil prices in 2020.
“If we strip out volatile oil revenues, we esti- mate the UAE’s non-oil budget deficit narrowed to just under 20% of non-oil GDP, down from 27% of non-oil GDP in 2015, and point to a tight- eningoffiscalpolicyinrecentyears,”Haquesaid.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the sharp fall in oil prices and the outlook for a price war added significant downside risks to the economic outlooks of GCC countries.
“We estimate that all GCC countries will realise a significant fiscal deficit at the current oil price... with Oman and Saudi Arabia seeing particularly significant shortfalls relative to GDP. A weaker oil revenue backdrop will require a meaningful pull-back in government spending, as was the case in 2015 and 2016, to limit the size ofthefiscaldeficit,”Maliksaid.
She sees a forecast increase in output from Saudi and Russia, and the changing dynamics of oil market fundamentals will likely bolster global oil stocks significantly in 2020. A number of oil-importing countries are also likely to accu- mulate inventories at the current low price levels, which in turn would lower oil demand during the second-half of 2020.
Furthermore, the outlook for inventories beyond 2020 will depend on global demand and coronavirus-related developments in the coming months, she added.
Edward Bell, commodity analyst at Emirates NBD Research, has said that the dust caused by travel restrictions and lockdowns owing to coro- navirus had not entirely settled yet.™
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