São Paulo – Oil’s low prices will impact the performance of large Arab exporters of the commodity in 2016. In turn, the countries of North Africa will have in the search for political stability their greatest challenge to reaching economic development.
Although they have large reserves and small debt-to-GDP ratios, the Gulf’s major producers should post in 2015 (the numbers are not final yet) a budget deficit of approximately 11.2%, on average, if the barrel’s price stabilizes around USD 55. In the last days of November, prices went under USD 39.
An analysis done by senior economist of the Research Department of the National Bank of Abu Dhabi (NBAD), Alp Eke, shows that the Gulf’s Arab countries have a large number of assets abroad and a small debt-to-GDP ratio, which reduces the impact of the decline in oil revenues. Still, lower earnings with their main product will make them post deficit even with spending cuts. The Gulf countries have been making an effort to reduce their oil-dependency, but still earn 65% of their revenues from the exploration of their reserves.
“This clearly shows a great dependency on oil’s revenues, which results in points of significant vulnerability. It’s estimated that GCC nations had around USD 3 trillion in net assets abroad at the end of 2014. These countries should post losses of more than USD 200 billion of these assets in 2015 alone”, assesses the economist.
When analyzing specifically the oil-producing United Arab Emirates, Eke says that the country is growing, however at a slower pace. Its expansion is being driven, especially, by the non-oil sector. In 2014, the UAE grew 4%. In 2015, it should reach a GDP growth of 3.4%. The non-oil sector is growing at a quicker pace at 5%.
“In 2016, a growth of around 3.2% is expected, again driven by non-oil activity. The lifting of sanctions against Iran will strengthen trade between the two countries and support the growth of [UAE] revenues”, said Eke. He also points out that trade with Iran will help the UAE reduce its budget deficit, which should account for 6% of the GDP in 2015 and 3% in 2016.
The NBAD’s regional manager for Latin America, Ângela Martins, told ANBA that the United Arab Emirates and Kuwait, for instance, have very strong financial reserves and shouldn’t come under a lot of pressure in 2016. Saudi Arabia also has strong reserves, however its population and economy are larger, which demands more spending and exerts more pressure over its resources.
The executive believes that the Gulf countries’ resources available to invest abroad, usually managed by sovereign funds, will still be available. But the challenge, in this case, is whether Brazil will be able to receive said funds due to its current economic scenario.
“There’s a bigger concern when it comes to Brazil, with the political crisis that the country is going through and the strong economic consequence. All the investors are more cautious. The use of the resources follow a trend of being more selective since [to invest] at moments of uncertainty carries a high risk”, she said.
An economy professor at Pontifical Catholic University of São Paulo (PUC-SP), Antonio Carlos Alves dos Santos said that there’s a belief that oil-importing countries in North Africa will benefit from the product’s low prices, by spending less on importing fuel and energy and using the resources in investments. In effect, however, the region depends on political stability to achieve these gains.
“It’s hard to separate political and economic issues. Apparently, it seems that the political issues are under control, however Libya is in a complicated situation and no one knows what could happen with it. For oil’s low prices to be converted to productive investment by the North African countries, strong institutions are necessary”, he said.
He gave tourism as an example, an economic activity that it’s important for countries such as Egypt, Tunisia, Morocco and even Libya. However, without a safety assurance, neither tourists nor tourism companies will invest in these countries. In Santos’ assessment, Libya needs a stable political scenario so it can reflect on other African countries, and not only in the North of the continent.
*Translated by Sérgio Kakitani
