GCC looks set to enjoy oil windfall this year

Governments are expected to remain disciplined on fiscal reform

The energy-exporting Arabian Gulf region’s growth is picking up on the back of higher oil prices. Reuters
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Geopolitical tension in Eurasia has ruffled financial markets in recent weeks and contributed to the almost 20 per cent increase in oil prices since the start of 2022.

In addition, oil markets are expected to remain relatively tight in the first quarter of this year, as supply is only gradually increasing while demand growth remains robust. However, over the rest of 2022, oil demand growth is set to slow as overall demand returns to pre-pandemic levels. At the same time production is heading steadily higher from both Opec+ and non-Opec+ producers such as the US, Canada and Brazil.

Emirates NBD now expects Brent oil to average closer to $80 a barrel in 2022, up from our previous $70 forecast at the start of the year. We also now expect GCC countries to increase production by more than previously expected this year.

Both these developments are positive for GCC sovereigns. Budget balances will improve by more than previously anticipated and headline gross domestic product growth will receive a boost this year as well.

The average budget balance for the GCC is now expected to move into surplus this year, for the first time since 2014. Saudi Arabia, the UAE and Qatar could have budget surpluses above 4 per cent of GDP. Oman, which faced external financing pressures in recent years, could also post a budget surplus if its oil production targets for this year are achieved.

GDP growth in the GCC could reach 6.5 per cent this year, a marked improvement from the estimated 2.8 per cent growth achieved in 2021. However, this is almost entirely due to expected double-digit growth in oil production in the larger GCC oil producers this year, rather than any change to expectations on non-oil sector growth.

In the past, GCC governments have increased spending when oil revenue increased markedly, contributing to faster growth in the broader economy. In our view, however, governments in the region are unlikely to boost general spending as a result of the expected oil windfall in 2022 and should remain committed to diversifying both their budgets and their real economies away from oil over the coming years.

Bahrain has pushed ahead with a doubling of its VAT rate to 10 per cent this year while the UAE has announced a new corporate tax that will come into effect from mid-2023. Oman too has made significant progress with fiscal reform and is expected to continue with this strategy over the coming years.

As a result, we do not expect higher oil revenue to feed through to significantly faster non-oil sector growth in the GCC this time.

While there will probably be additional money for investment in key strategic sectors, mainly through sovereign investment funds, higher petrol prices are expected to weigh on household consumption. A faster pace of monetary tightening in the US, relative to our expectations at the start of this year, is also set to be a headwind to growth in the non-oil sectors of the GCC economies.

Overall, then, the non-oil sectors in the GCC will probably have a much more moderate rate of growth this year than the headline GDP figures suggest.

The oil windfall that now looks likely in 2022 could certainly test the resolve of GCC governments to continue to put into effect sometimes difficult and unpopular fiscal reforms. If higher oil revenue is passed on to businesses and households in the form of higher spending or increased subsidies, then this could result in faster non-oil growth than we currently expect over the next year.

On the downside, however, a correction in oil prices because of a diplomatic resolution to the Russia-Ukraine issue or a return of Iranian oil to the market could deter GCC countries from increasing oil production as expected, and weigh on headline GDP growth.

Khatija Haque is chief economist and head of research at Emirates NBD

Updated: May 17, 2023, 4:40 PM