Q&A: Athanasios Tsetsonis, Emirates NBD

Global distortion in oil prices has not only affected the overall economy of the GCC; it has also pushed the oil-dependant states into budget deficits. But should we expect to see light at the end of the tunnel?

Budget deficits will definitely be affected by the lower oil prices, explained Athanasios Tsetsonis, sector economist at Emirates NBD.
Budget deficits will definitely be affected by the lower oil prices, explained Athanasios Tsetsonis, sector economist at Emirates NBD.

How are falling oil prices likely to affect the overall economy of the UAE?

Global oil prices remain in a very volatile phase. In the case of the GCC countries, all regional budgets are still heavily reliant on oil prices. But the UAE economy is quite well diversified since 40% of its GDP comes from non-oil sectors, with India and China being its top non-oil trade partners. These sectors have shown growth in H1 2015, although the pace of growth has been slow from the beginning. The UAE increased its oil production in H1 2015, and the impact so far on the GDP has been positive. Also, the deregulation of fuel prices by the UAE government will definitely benefit the budget directly, and will offset the decline in oil revenue and freeing up resources such as infrastructure.

What will be the impact of low oil prices on GCC budgets in 2015?

Budget deficits will definitely be affected by the lower oil prices. In H1 2015, budget deficits appear to have been financed mainly from reserves. Saudi Arabia recorded its first budget deficit in over a decade in 2014. The UAE is also expected to run into a budget deficit of around 5% in 2015, whilst Kuwait will face a deficit of 6%. Oman and Bahrain are likely to run into higher deficits of 12.5% and 12.2%, respectively. Also, low prices will exert pressure on the oil exporters’ budgets with regards to high spending commitments.

Will non-oil sectors boost GCC economies?

The UAE has less to worry about, since more than 40% of its GDP contributions come from the country’s non-oil sectors. According to our research, infrastructure spending will reach almost $6bn (AED22bn) until Expo 2020. The Emirate is also targeting around 20-million tourists per annum by 2020, and so requires another 160,000 hotel rooms. Also, we have seen growth in the construction sector with quite a lot of projects being announced.

On the other hand in Saudi Arabia, government spending has kept high momentum, although a 10% decline in total expenditure is expected this year. Qatar is going to go through a booming phase, all thanks to the FIFA 2022 World Cup. Total infrastructure spending leading to the event is estimated at around $100bn (QAR364.21bn), out of which $16bn (QAR58.27bn) has been designated for infrastructural development.

How will the Iran sanctions benefit the GCC states once it is in place?

Iran retains the largest untapped potential in the Middle East and North Africa (MENA), with the sanctions being removed in 2016. The Iranian government is already looking to attract foreign direct investment (FDI) and the implementation of subsidies. The country has natural gas reserves and the world’s fourth-largest oil reserves. According to our research, it’s a huge domestic market and will open up gates for investment opportunities for the neighbouring countries. With the Iran situation at the moment, there is an opportunity for the GCC to do well out of that.

What is the region’s outlook for the rest of 2015?

Growth in Q1 2015 was disappointing, but it is expected to remain stable in spite of the difficult regional environment. Economic momentum is rising in Egypt, and Morocco looks set to perform well in the long term. Although economies must be cautious of weaker remittances, aid, investment, and export demand, the region’s economic backdrop has started to show signs of improvement in several areas. Moreover, construction has started at large-scale projects that were previously stalled, and we have also seen an increase in FDI inflows.

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