Oil-dependent Gulf economies are expected to contract this year before rebounding in 2021, a Reuters poll among analysts has shown.
According to them, Saudi Arabia’s economy will shrink by 5.2 percent this year. This is a significant downward revision on the previous quarterly forecast in the Reuters poll, which saw a 1-percent growth rate for this year and 2 percent for 2021. Now, the analysts expect the Saudi economy to grow by 3.1 percent in 2021.
The reason the forecast is so different is that the last time the poll was conducted, no one could have anticipated the extent of the coronavirus outbreak’s fallout on economies and oil demand. The last poll also did not factor in the OPEC+ production cuts, according to one analyst, Oxford Economics senior economist Maya Senussi, who spoke to Reuters.
Saudi Arabia may be hit hard but it will not be hit the hardest. The strongest blow, according to the analysts, will be borne by Kuwait, whose economy is seen shedding as much as 6.1 percent this year before it rebounds to 2.5 percent positive growth.
The United Arab Emirates will suffer a contraction comparable with Saudi Arabia’s, at 5.1 percent, and enjoy a rebound to 2.6 percent in 2021, according to the polled analysts.
An earlier forecast from this month, courtesy of IMF’s director of the Middle East and Central Asia department, said the six members of the Gulf Cooperation Council will contract by a combined 7.6 percent this year because of the oil price slump and the coronavirus pandemic.
“The oil sector will shrink sharply by around 7.0 percent and it will be accompanied by a drop in the non-oil sector also,” said Jihad Azour in early July.
In fact, even before the crisis began, the IMF said—in February this year—that low oil revenues could result in Gulf economies seeing their financial wealth vanish in 15 years.
“At the current fiscal stance, the region’s existing financial wealth could be depleted in the next 15 years,” the IMF said at the time, adding, “All GCC countries have recognized the lasting nature of their challenge ... However, the expected speed and size of these consolidations in most countries may not be sufficient to stabilize their wealth.”
By Irina Slav for Oilprice.com
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But contrary to the analysts’ projection, it isn’t Kuwait that will be the hardest hit. It is Saudi Arabia and UAE whose economies are projected to shrink this year by 5.2% and 5.1% respectively because of the pandemic before rebounding next year at projected rates of 3.1% and 2.6% respectively.
The reasons why Kuwait will be hit less than Saudi Arabia are a far smaller budget than Saudi Arabia, healthy oil exports exceeding 2 million barrels a day (mbd) before the pandemic, a much bigger sovereign fund that Saudi Arabia’s and a smaller budget breakeven price of $70 a barrel compared with Saudi Arabia’s $84-$91.
Kuwait’s Investment Authority (KIA), the fifth biggest sovereign fund in the world, has access to $592 bn to cushion it in times of low oil prices compared to Saudi’s $460 bn of which some $300 bn should be kept always at a standby for the defence of the Saudi Rial pegging to the dollar.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London