The current account surplus of the GCC will shrink to about $40 billion in 2015 from $266 billion in 2014 as the region’s fiscal position shifts to a deficit of 7.4 per cent from a surplus of 4.6 per cent of gross domestic product, according to Dr Garbis Iradian, chief economist of the Institute of International Finance, or IIF.
However, the slump in oil prices not only presents challenges but also opportunities for the Middle East and North Africa, he argued. “While overall growth in the oil exporters will moderate and the large fiscal surpluses will decline or shift to significant deficits, low oil prices may encourage an acceleration and deepening of structural reform efforts to improve energy efficiency and diversify their economies.”
Dr Iradian noted in an IIF report that non-oil countries in the region will benefit from the fall in oil prices through reduced oil import bills and lower fuel subsidies.
“In our baseline forecast, the price of Brent is projected to average $60 per barrel in 2015 and $72 per barrel in 2016. We assume a pickup in oil prices from the second half of 2015 as demand growth responds to the price fall and supply growth is cut back, especially in the US. However, the outlook remains highly uncertain, and could be affected by events in the region.”
He predicted that oil prices could be lower if sanctions on Iranian crude oil exports start to be lifted after the end of June of this year and if Libya’s oil production recovers significantly.
“For the 16 Mena countries as a whole, we expect average growth to pick up slightly from 2.8 per cent in 2014 to 3.2 per cent this year, driven by the recovery in Egypt, Morocco and Iran [if sanctions are eased, even partially].”
For the GCC, the IIF has reduced its growth forecast by 0.4 percentage points to 3.4 per cent in 2015. However, outside the oil sector growth will remain strong at 4.5 per cent, only slightly lower than last year. The 40 per cent oil price drop from 2014 prices implies a massive shift in external and fiscal accounts. Exports from Mena oil exporters will be reduced by $300 billion in 2015. For the GCC, the aggregated current account surplus will shrink from $266 billion in 2014 to about $40 billion in 2015, and the fiscal position will shift from a surplus of 4.6 per cent of GDP to a deficit of 7.4 per cent.
“For the short term, ample public foreign assets and low debt in the GCC countries and Algeria will mitigate the adverse impact of low oil prices on economic activity and allow public spending to continue growing, albeit at a slower pace than in recent years. If the oil slump continues beyond the near term, we expect most oil exporters to move more seriously towards a fiscal consolidation stance to avoid a significant rundown of foreign assets,” the report said.
The IIF suggested that low-priority projects could be postponed or phased over time without impeding longer-term growth prospects or diversification efforts. The tax base could be broadened, including through the introduction of a value–added tax that would provide additional sources of nonoil revenue and thus reduce the burden of adjustment needed on the expenditure side.
“More importantly, the rapid pace of growth in domestic consumption of petroleum products could be reduced. This could be achieved by intensifying ongoing efforts to improve efficiency and by gradually raising the prices of domestic petroleum products.”