Oil blow: IMF warns Gulf states against knee-jerk reaction

The International Monetary Fund (IMF) is not worried about a decline in Saudi reserves, says a top IMF official.
But Masood Ahmed, IMF Middle East and Central Asia chief, points to a midterm need for fiscal adjustment and development of the local capital market.
GCC states should “not react in a knee-jerk way to lower oil prices,” he said in published remarks.
An IMF team will visit Saudi Arabia this month to assess government plans, Bloomberg quoted him as saying.
Ahmed also said it was too early to assess the impact on Saudi Arabia from the campaign against Houthi violence in Yemen, but said the Kingdom’s financial buffers will help meet the cost.
“It will be one source of additional pressure,” he said in an AFP report, adding however that the “Saudi government has the financial reserves to be able to underwrite the budget deficit.”
According to Bloomberg, the IMF projects Saudi Arabia’s nonoil economy will grow at 4.6 percent this year, down from 5 percent last year and 6.5 percent in 2013.
Ahmed’s remarks came as the IMF released its Regional Economic Outlook Update.
It covers the Middle East, North Africa, Afghanistan and Pakistan.
The report said: “In the GCC countries, growth is forecast at 3.4 percent in 2015, revised downward since last October by 1 pp, mainly because of a slowdown in nonoil growth in response to lower oil prices. In Saudi Arabia, the growth forecast for 2015 is now 3 percent, down 11⁄2 pp from last October, although half of this revision owes to the rebasing of real GDP data.”
The oil price decline has affected financial markets in oil exporters in the region, said the report.
In the GCC, it said that inflation is expected to decline by 1⁄2 pp to just above 2 percent because of strengthening currencies (pegged to the US dollar) and declining food prices. Lower oil prices are unlikely to affect inflation significantly, because most countries use administered prices for fuel products.
According to the report, the current oversupply in the global oil market suggests that GCC may face challenges in maintaing market share, with potential downside pressures on oil production. Government spending and hence nonoil activity may slow down by more than expected. However, a faster- than-expected recovery in oil prices would support government spending and nonoil growth. Overall, the risk of volatility in oil prices has risen, at least in the short term, because of complex interplays between traditional and shale oil production and geopolitical risks.
Under the current oil price assumptions, the fall in anticipated oil export earnings in 2015 is $287 billion (21 percent of GDP) in the GCC and $90 billion (11 percent of GDP) in the non-GCC countries.
In the GCC, a combined budget surplus for 2014 of $76 billion (41⁄2 percent of GDP) is expected to turn into deficit of $113 billion (8 percent of GDP) in 2015, narrowing only partly over the medium term to 1 percent of GDP.
Gulf oil exporters must reduce spending, including subsidies, and diversify their economies to cope with lower revenues caused by the sharp drop in crude prices, the International Monetary Fund said.
They would be better off to “adjust gradually” using the large financial reserves they have accumulated during several years of bumper oil receipts, he said in Dubai.
But as oil prices have dropped lower than budgeted breakeven levels, “it is important that they gradually, but in a determined way... reduce their spending (and) consolidate their fiscal position,” Ahmed said.
Oil prices have shed half of their value since June 2014, and are expected to be lower than the breakeven point for Gulf countries in the next three to four years.
The Gulf Cooperation Council includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — economies all heavily dependent on energy revenues.
A combined budget surplus for 2014 of $76 billion (68.5 billion euros) is expected to turn into a deficit of $113 billion this year, the IMF said in its latest regional report.
“They need to act to reinforce their efforts to diversify their economies to become less dependent on oil,” said Ahmed, pointing out that many have already taken such measures.
“The UAE is more advanced in terms of diversification. The others also are in varying degrees trying to encourage private sector activity outside the oil area.”
The IMF urged GCC countries to cut energy subsidies in a bid to minimise public spending and trigger a change in consumer behavior.
“Most GCC countries still have the domestic sale price for energy products below the international prices... We think that over time it is important to tackle the issue of energy subsidies to reduce them,” Ahmed said in the AFP report.
Gulf states should also contain salary growth in the public sector, which usually employs nationals as opposed to the private sector that depends on millions of foreigners.
In addition, GCC countries would need to prioritize investment projects that “most advance the development agenda,” said Ahmed.
Oil-export revenues for GCC countries are forecast to be $280 billion lower this year than a year ago.
With the exception of Qatar and Kuwait, all GCC states are expected to face budget deficits this year, said Ahmed, adding this could persist for two or three years.
“The important thing to recognize is that GCC countries have built up financial buffers that put them in a very strong position to be able to use these savings to finance expenditure and to have a gradual decrease in spending over the coming years,” he said.
This in turn would minimize the economic impact of the drop in oil prices.
GCC states are estimated to have foreign reserves of about $2.5 trillion.
“The impact on (economic) growth is quite limited,” said Ahmed.