Does oil price surge herald an end to austerity in GCC?

Higher oil prices may tempt GCC governments to ease fiscal consolidation programs. (AFP)
Updated 11 May 2018

Does oil price surge herald an end to austerity in GCC?

  • Crude oil prices have risen 18 percent since January
  • Rising prices are good news for governments that have had to cut spending following a slump in prices from late 2014

LONDON: A surge in the price of crude in the run-up to President Donald Trump’s decision to jettison the Iranian nuclear accord, as well as an agreement by Russia and OPEC to cap production, has been good news for the oil-producing nations of the Middle East.
In GCC countries, higher prices could lift gross domestic product, bolster government coffers and pave the way for budget surpluses or at least smaller deficits.
The recovery could also lead to additional public spending to stimulate consumption in countries that — up until now — have been reeling from austerity following the oil price collapse of 2014.
In truth, the outlook is less than clear. Oil price volatility could now become the new normal, said experts. “If you accept the fact that after Tuesday’s (Iran) decision, the oil market will stay volatile, then here we are ... price movement right now is pretty unpredictable,” said PVM Oil Associates strategist Tamas Varga, cited on Thursday by CNBC.
And this from Adrian Del Maestro, oil and gas strategy director at PwC in an interview with Arab News: “Volatility, in all its ramifications, continues to impact the market. “This is another example of geopolitical factors increasingly supporting oil.”
But given the 18 percent rise in the price since January, won’t it be tempting to ratchet up central government expenditure, easing pressure on consumers who have been hit by higher taxes (VAT in particular), as well as subsidy cuts?
Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB) said: “There’s still quite a weak domestic demand environment in the region, although higher crude tariffs are clearly positive for GCC oil exporters.” 
Malik reckons governments will take a cautious approach. “Producers will wait and see where the oil price goes from here, and will refrain from doing anything rash,” she said.
An ADCB update on the KSA economy published this week said in the first quarter of this year, government spending rose by 17.8 percent year- on-year, reflecting a marked shift to a more expansionary fiscal stance. “This follows three years of contraction in government spending, including by -0.4 percent in 2017. The first quarter rise was supported by the allowance package for nationals announced in January 2018 and, to a lesser degree, payments from the Citizens Account to support low and mid-income families, it said.
The bank noted that the deficit widened by 31 percent year-on-year to SR34.3 billion ($9.1 billion). “This increase came despite a healthy rise in government revenue in the quarter (up 15.4 percent year on year)."
Despite this, ADCB forecast a narrowing in the full-year fiscal deficit in 2018 to 7 percent of GDP. “We see government oil revenue rising in the remaining quarters of this year, especially with the increase in the price from March,” the bank said.
Jason Tuvey at Capital Economics added his voice to those who say Saudi Arabia is loosening the purse strings.
“Saudi first quarter figures showed the underlying fiscal stance was easing, despite the introduction of new taxes, with the latter more than offset by spending on public sector bonuses and the introduction of a new household allowance.”
A Capital Economics report said Riyadh’s oil revenues would be around 5-6 percent of GDP higher in 2018 than in 2017. “That, combined with higher non-oil revenues, should more than offset the rise in spending.”
It added: “We expect looser fiscal policy to start to support a pick-up in growth in the non-oil economy over the coming months.”
Longer-term, however, Capital Economics expects the oil price to drop back over the next couple of years, possibly to $55 per barrel
by 2019.
Downside risks include a ratcheting up of US shale output that would alleviate potentially tight supply; global energy demand may not hold up as well as expected, while higher energy costs could turn the screws on industry.
“If that happens, it could prompt a resumption of austerity, as KSA and others look to rebuild their balance sheets,” according to Capital Economics.
But it would be churlish to ignore the good news. Saudi Arabia’s current account is back in a surplus, and has been for a few quarters. “That shows they have made a good adjustment,” said Tuvey. The turnaround had come mainly as a result of reduced consumption (as higher taxes kicked in) which had a knock-on effect of cutting imports.
Countries such as Kuwait and the UAE have been riding the oil price slump quite well, according to World Bank data, and their budget and current account positions should show substantial surpluses. But worries persist about Bahrain and Oman, where public finances are stretched.
What about GCC stock markets? Turvey contends that GCC equities haven’t gone up as much as expected given the upward path of oil prices. The Tadawul had drifted in the past few weeks.
That said, there is little evidence regional markets have been discounting for increased geopolitical risk, highlighted by clashes between Israel and Iran in Syria, and the potential for blow-back following the election of a Hezbollah-supported government in Lebanon.
Craig Erlam, senior market analyst at foreign currency broker Oanda in London, told Arab News: “It really does seem to be quite a time since investors took notice of heightened geopolitical risk. Whether it’s complacency or a belief that things will only escalate so far is hard to tell.”
Faster rate hikes from the US Federal Reserve are making a bigger impact on stock markets right now, said Erlam. In its May economic update on the region, the IMF noted that conflicts and geopolitical risks persist, and commitment to the implementation of key fiscal measures and structural reforms could weaken, considering the observed increase in oil prices.
The report added: “(But) the continued commitment to fiscal consolidation, although at a slower pace, could, in contrast, boost investor confidence and result in stronger growth.”
ADCB’s report said that if oil prices remain at the current level, there could be some additional increase in government spending (above its current forecasts).
“However, we believe that this could take time to implement, especially as it will likely be driven by capital expenditure.”
The report said any additional support may be more likely to come at the end of 2018 or in 2019.

Iran sanctions shadow falls on smaller German banks

Updated 35 min 26 sec ago

Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.