Can high oil prices alone improve the GCC’s economic prospects?

Dubai: Economists predict higher economic growth for GCC countries, driven by high oil prices, which will boost their fiscal and current account balances. However, some argue that a short-term spike in hydrocarbon prices alone cannot sustain growth momentum.

Past experience shows that oil exporting countries have been susceptible to boom and bust cycles depending on the direction of hydrocarbon prices. Many economists argue that sustainable growth can only be achieved through effective structural changes to these economies and appropriate economic diversification geared towards reduced reliance on oil exports.

According to the Standard & Poor’s rating agency, higher oil and gas prices generally improve the fiscal and current positions of hydrocarbon-exporting sovereign states. However, the rating agency also considers the prolonged and, in some cases, continued structural deterioration of their equity positions – net government debt and net foreign debt – as well as modest fiscal and economic reform momentum as key rating considerations.

Economists recognize the immediate benefits of soaring oil prices on the terms-of-trade gains of oil exporters.

“Major oil exporters are benefiting from a huge improvement in their terms of trade thanks to higher prices, leading to larger current account surpluses, particularly in Saudi Arabia, the United Arab Emirates, Qatar and Russia,” said Garbis Iradian, IIR’s chief MENA economist.

Fiscal balances in major oil-exporting countries will shift to large surpluses in 2022. Net government revenue accounts for more than half of total government revenue in GCC countries. Consequently, the 2020 budget deficits are expected to turn into surpluses in 2022 in most of these countries.

Structural change

Oil prices have been in structural shit since the second half of 2014 with long-term implications for government revenues for oil exporters.

The post-pandemic recovery is expected to accelerate demand for alternative energy and erode demand for fossil fuels. BP, one of the world’s seventh-largest oil companies, wrote last year that declining fossil fuel use and the rise of renewable technologies are structurally changing energy demand and are expected to put pressure on the drop in oil prices in the longer term.

“We distinguish between structural and cyclical changes in oil prices. We have downgraded most of our ratings on sovereign hydrocarbon exporters since the structural change in the oil market that began in the second half of 2014. We expect relatively modest oil prices over the longer term. As our ratings already take these structural changes into account, we do not expect cyclical price changes to affect them significantly,” said S&P analyst Trevor Cullinan.

Is it different this time?

Economists and analysts consider the political response of hydrocarbon exporters to structural changes in the oil market to be a key element of medium and long-term growth prospects.

Many believe that GCC states are serious about long-term changes to their economies. The Gulf States’ relentless push to achieve structural transformation away from hydrocarbons will continue to gain momentum this year according to MUFG Bank.

GCC countries have worried about the sustainability of their hydrocarbon revenues for decades. Historically, public and private sector activity in the GCC is highly dependent on government funded projects and consumption which are ultimately supported by oil and gas revenues. Increasingly, governments are realizing the need to have diversified revenue streams, prompting the introduction of value added tax and corporation tax in many more countries. structural reforms to increase private participation in their respective economies.

“Rising government revenues and streamlining spending in 2022 budgets strengthen balance sheets and provide greater fiscal capacity to navigate to a post-pandemic equilibrium – also supportive of debt markets, which not only improves debt profiles stabilizes sovereign ratings, but reduces new issuance and restricts supply, thereby easing the debt burden,” said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.

S&P analysts say several factors will determine the longer-term outlook for oil exporters. When higher oil prices translate into higher revenues, governments can choose to let their fiscal balances improve or they can decide to increase spending to support their economies. Governments can use the reduced pressure on public finances to delay planned spending cuts or the implementation of measures to diversify their sources of revenue.

“We assess the effects of changes in oil prices alongside these factors and many other factors such as GDP, inflation and the sovereign’s external position. Even if oil prices rise further, we would not necessarily expect the sovereign ratings of hydrocarbon-exporting sovereigns to return to pre-2015 levels, absent changes in other rating factors,” said Cullinan of S&P.


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Felix J. Dixon