Rising deficits to impact Gulf oil sector in 2016

Constrained government budgets are poised to have the largest impact on the region's energy industry, finds survey

OPEC chief Abdallah Salem el-Badri.
OPEC chief Abdallah Salem el-Badri.

Rising deficits and constrained government budgets will have the biggest impact on the region’s energy industry in 2016, a recent survey by Gulf Intelligence has found.

Economies in the Gulf, including Saudi Arabia and the UAE, face challenging times in 2016 as the oil price hovers around the $30/bl mark, hitting a 12-year low.

Fiscal pressure has been steadily building since oil prices started a sharp downward trend in June 2014, with Saudi Arabia posting its biggest ever budget deficit last December, at $86bn – equivalent to about 16% of GDP.

Kuwait posted its first budget deficit in fifteen years in mid-2015, with both the UAE and Oman also facing larger deficits.

“In 2015, we saw that most of the Gulf countries took a budget hit from lower oil prices, but they kept spending relatively high and their economies kept growing,” said Marios Maratheftis, global chief economist at Standard Chartered Bank.

“2016 will be different as it looks like Saudi Arabia is not willing to keep spending as it was and neither is Oman. If oil prices average $40/bl this year, we should expect less spending from GCC governments, which will translate into lower economic activity," he added.

The majority of Gulf countries have taken the unprecedented move to reduce fuel subsidies in a bid to offset growing budget deficits.

Kuwait, the UAE and Saudi Arabia, respectively, were among the first countries in the Gulf to introduce cuts in 2015.

Another wave of subsidy reforms is expected in the Gulf this year, which is likely to include Oman’s first subsidy cuts.

Over a third of the survey respondents (38%) expect China’s recent economic uncertainty will have the greatest impact on the Middle East’s energy industry, as the country’s growth slowed to a 25-year low in 2015.

China’s 6.8% growth in the fourth quarter of 2015 alone is more than respectable by global standards, but it marks a significant slip from the country’s usual 10% growth.

Questions still abound over what financial measures Beijing plans to introduce in 2016 to curb any further losses.

The US’ decision last month to increase interest rates for the first time in a decade and Europe’s poor economic growth are expected to have little impact on the Middle East’s energy industry this year, with only 3% and 1% of respondents highlighting them during the GI Industry Survey.

The primary impact of the US’ move will be reflected by emerging countries’ currencies, including Turkey, Brazil and Malaysia.

H.E. Dr. Emmanuel Ibe Kachikwu, Nigeria’s Minister of State for Petroleum Resources and OPEC President (2015) said an emergency meeting of OPEC members may be called during the first quarter of this year to address lower oil prices.

Half (51%) of respondents said oil prices are unlikely to rise above an average of $40/bl this year, while nearly a third of respondents (28%) cited $30/bl.

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