Despite the surpluses slipping into deficits (because of the oil price fall), the region should be able to sustain the current level of spending and imports with oil prices at $ 45/bbl in the short term, though with budget and current account deficits.
“We believe an oil price of $ 45 is manageable in the short term given GCC’s large savings. But the face of the region will likely start to change as the mega twin surpluses over the past couple of years slip into deficits,” it said.
From a historical perspective, oil at $ 45/b may not seem that low as the last 10-year average was $ 42/b and $ 45/b represents end-2004/early 2005 levels.
But the GCC economy totalled only $ 480bn back then, half of its 2008 size, and it was home to under 6mn people.
Total budget expenditure was $ 146bn (30% of GDP) and total external debt was $ 84bn (18% of GDP), vs $ 314bn (32%) and $ 350bn (35%), respectively, in 2008.
As the big leap up was driven by the geared quasi sovereign and private corporates, while the public sector was accumulating surpluses, savings will be put to work on the way down, though selectively.
“Some consolidation seems inevitable even at a $ 45, but another leg down will cause significant stress for GCC members and hurt investor sentiment.
The region’s average budget and current deficits could then reach 20% of GDP, ringing alarm bells.
Still, as almost 90% of budget revenues come from oil, the oil price is a constraint on fiscal spending. As discussed above, a further slide in oil prices is likely to push the fiscal and current balance into double-digit deficits. This will call for faster consolidation with more project delays/cancellations, lower non-oil growth and higher default rates in non-strategic private sector businesses,” Merrill Lynch said.
“We estimate the GCC 2009 budget breakeven oil price at $ 52/b but given the expected overspend and our base oil price assumption of $ 45, we expect actual breakeven at $ 60 for the GCC.
“On this basis, we expect a budget deficit of 5% of GDP in 2009 vs an estimated surplus of 30% in 2008. We expect a slight current account surplus of 1.5% of GDP, mainly thanks to Kuwait, and almost flat GDP growth on average in the region despite contractions in Saudi Arabia, Kuwait and the UAE.
“On the bright side, if oil prices hit a floor at around current levels and start gradually increasing from H209, it will not only improve our forecasts based on $ 45/bbl, but will also support investor sentiment in the region.”
