Worst over from oil price slump

Samy Chaar, the chief economist at the Swiss private bank Lombard Odier, said countries in the region should not rest on their laurels and must continue to forge ahead with diversifying their economies to make them less reliant on oil.

GCC economies might be over the worst effects of the oil price crash which began in 2014, said Samy Chaar, the chief economist at the Swiss private bank Lombard Odier.

Still, he said, countries in the region shouldn’t rest on their laurels and must continue to forge ahead with diversifying their economies to make them less reliant on oil even after the price of oil almost doubled from last year’s multi-year low.

The economist said it was unlikely that oil would be shooting back up to the days before the collapse in oil prices, when it averaged US$100 a barrel for several years before crashing to as low as $28 a barrel last year.

“I would say we’ve passed the trough – wherever, Russia, Brazil, 2016 was the trough and I think it was the same for the region,” he said. “It is a change of paradigm, things are not going to be as they were when commodity prices were much higher but it is still going to be an ambitious route ahead, a long painful road to economic prosperity.”

Indeed a painful patch of that road occurred late last week.

Giving back some of the gains made in the past 16 months, the price of Brent crude fell below $50 a barrel last week for the first time since late March. Since then, it has rebounded, rising 0.14 per cent to $50.84 a barrel on Friday.

Mr Chaar said the UAE and Kuwait were among the best positioned Arabian Gulf countries to rise to the challenge of an era of lower oil prices, because of their high cash reserves and low debt. All the countries in the region will, however, need to adapt to the new reality of lower oil prices and begin to implement taxes such as value added tax, he said.

Since the price of oil began its sharp descent in mid-2014, governments in the region have reduced energy subsidies, cut spending and raised debt in international markets to prevent deficits from spiralling.

Saudi Arabia said on Thursday that its first quarter deficit shrunk to 26.2 billion Saudi riyals (Dh25.65bn) amid higher energy prices compared to 91bn riyals in the same period last year.

At the same time, these countries have outlined ambitious plans to transform their oil-reliant economies with measures that include selling off some stakes in major state companies such as Saudi Arabia’s Aramco, the world’s largest oil producer.

Not everyone, however, thinks that the Gulf region is over the worst. The GCC is likely to experience lower economic growth in 2017 versus last year amid lacklustre oil prices and continued cuts in spending on government projects, according to a report last month by the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics.

The authors of the report said that GDP growth was likely to slow to 1.1 per cent this year, the weakest since the global financial crisis of 2008, from 2 per cent in 2016.

Real GDP growth for GCC oil exporters is forecast at 0.9 per cent this year, down from 2 per cent last year and 3.8 per cent the year before, the IMF said in its latest economic forecast.

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