A re-think on austerity likely as oil climbs
dubai — Gulf economies, which are among the big gainers from the oil price rally triggered by the US pullout from Iran nuclear deal, might be prompted to have a re-think on austerity measures, economists believe.
Following a decision by US President Donald Trump to pull the US out of the nuclear deal with Iran, Brent crude has risen further and has broken through $80 per barrel in recent days — its highest level since late-2014.
“The sudden rally in oil prices has already prompted governments across the Gulf to shift away from the harsh austerity of recent years. But greater prudence and low long-term oil price expectations will limit any splurge,” analysts at Capital Economics said. The UAE, Kuwait and Qatar have most scope to loosen fiscal policy while Saudi Arabia can follow suit up to a lesser extent. As the region’s annual hydrocarbon export revenues are poised to surge 8.5 per cent to $170 billion compared to 2017, they said.
“Oil has surged towards $80 in reaction to the news that energy company Total could leave Iran in the wake of renewed sanctions. Following the US’s decision to impose sanctions on the country once again, investing in Iran has become a risky prospect for businesses. As a result, Total have signalled their intent to leave unless provided a waiver from the US governments that they will not impose sanctions on non-US companies,” said Mihir Kapadia, chief executive officer and founder of Sun Global Investments.
Increased geopolitical tensions in the Middle East, plunging Venezuelan production, and now the US withdrawal from the Iran nuclear deal could push Brent crude prices to $82.50 a barrel by summer, Goldman Sachs said. A possible loss of 500,000bpd of Iranian crude oil supply in the wake of new US sanctions on Iran would push up oil prices by around $6.20 a barrel, according to Goldman Sachs. Economists are of the view that the increased oil revenues would
Total have signalled their intent to leave unless provided a waiver from the US governments that they will not impose sanctions on non-US companies Mihir Kapadia, CEO and founder, Sun Global Investments
help GCC states to improve current account positions and provide a boost to budget positions.
Economists at MUFG Bank, the largest Japanese bank, said the UAE’s low aggregate debt stock and high level of reserves leave it well-positioned to be the best performing economy in the GCC region despite regional geopolitical tensions. However, the impact of higher oil prices on the GCC will be different this time, analysts at Capital Economics argued. “After several years of harsh austerity, governments in the Gulf are more likely to use the windfall to boost spending and support economic growth, rather than stash it away in their sovereign wealth funds. Indeed, there are already signs that governments are taking a laxer approach to their public finances,” they said. Earlier last week, Kuwait’s parliament agreed to postpone the implementation of a new value-added tax until 2021 at the earliest. And recentlyreleased data show that Saudi Arabia’s underlying fiscal stance was loosened in first quarter as a sharp rise in spending more than offset an increase in non-oil revenues.
They believe the UAE, Kuwait and Qatar appear to be in the strongest position to loosen fiscal policy. Oil prices are now at or well above the level needed to balance their budgets and strong balance sheets mean that they could easily afford to run deficits. “At the other end of the spectrum, Bahrain and Oman still need to tighten fiscal policy, although higher oil prices may provide room for the pace of austerity to ease. Saudi Arabia sits some- where in the middle.” In the case of Kuwait, Qatar and the UAE, current oil prices — between $70 and $80 — are more than sufficient to cover spending needs. In contrast, Saudi Arabia, Bahrain and Oman need oil prices to rise even further in order to balance their budgets.
On the contrary, some analysts believe that while oil price recovery has provided some reprieve to GCC governments’ budgets, materially higher oil prices also present a major challenge to the region should reform momentum slow. Following the implementation of subsidy and spending cuts, governments are pursing various revenue-raising measures including the introduction of VAT and privatisation programmes aimed at increasing the role of the private sector in the economy.
— issacjohn@khaleejtimes.com