MENA oil exporting countries seen to incur ‘twin deficits’

According to a report, oil prices are expected to trade in a range of $25-45 during the remainder of the year

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The outlook for the oil exporting nations in the MENA region — Algeria, Bahrain, Iraq, Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the UAE – is generally and unsurprisingly quite difficult as they adjust to the ‘New Normal’ of oil prices being in a rather lower range, National Bank of Abu Dhabi (NBAD) published its Global Investment Outlook 2016 entitled ‘Investment Strategies in Today’s Volatile Markets’ said.

The report said supply pressures are expected to persist for the time being in the oil market, with extra supply expected to come on from Iran and Iraq.

Iran is expected to reach pre-sanction oil production levels by the end of 2016, meaning an additional 500,000-700,000 million barrels.

Saudi Arabia is estimated to have an additional 1.5-2.0 million barrels of capacity available, NBAD report added.

With serious pressure on budgets, almost all the exporters will register ‘twin deficits’ (current account and fiscal) for 2015/16. Due to fiscal adjustments, however, the magnitude of these deficits is expected to decline in the current year, it noted.

There has been much made of the extent to which the oil exporters, especially the GCC members, have foreign assets that can be sold and/or which generate other income, although these assets were being depleted at an alarming rate during 2015, it further said.

Especially during the second half of 2015, falling oil exports and declining government revenues were met with reductions in government spending, which is turn led to a further slowdown in economic activity via negative multiplier effects

This year, further fiscal adjustments will be necessary to avoid further significant asset depletion. The UAE was the first nation in the GCC to respond to the oil price decline. State energy subsidies have been reduced, non-critical projects have been postponed, and alternative methods to fund government spending are being considered, including VAT, income and corporate taxes, privatizations, and bond sales.

The GCC oil exporters’ decisions to focus on fiscal policy strongly suggest that for the time being they will maintain their currency regimes, despite pressures resulting from them, the report further said.

The GCC currency pegs force governments to follow US monetary decisions, irrespective of whether this is appropriate, because the GCC economies are slowing down, they could be facing monetary tightening at the wrong time, it said.

During 2016, the GCC region is expected register an overall fiscal deficit of around 10% of GDP, indicating continued vulnerability unless oil prices rally and/or there are further spending cuts.

– Saudi Arabia registered a fiscal deficit of 16% of GDP in 2015 (~ $100 billion), and is expected to register a budget deficit of 13% of GDP in 2016, NBAD report said.

The Saudi riyal is thought to be theoretically overvalued by around 16-17% vs. their main trading partners’ currencies, it added. On a similar basis, the UAE dirham could be overvalued by more than 25%, it noted.

Despite the asset depletion mentioned earlier, the GCC countries as a group have financial buffers in place, together with low sovereign debt, and are therefore better prepared than many other oil-exporting nations for low oil prices.

The report moreover said government spending in the GCC countries, although at reduced levels, will still be at levels considered healthy by many other nations.

Claude-Henri Chavanon, NBAD’s Head of Global Asset Management said: “The fall in the oil price has complicated investment decisions around the world, and has been described as the ‘New Normal’. It is a significant shift in the global investment landscape that investors have to deal with. The risks associated with a strong dollar are amongst those uppermost in our minds, especially insofar as this could exacerbate the reduction in US corporate earnings. However, there are always opportunities arising from a new idea, asset class or company, or due to an existing asset being oversold. Investors will need to exercise patience and then have the courage required to decisively deploy funds when opportunities arise.”

According to the report, oil prices are expected to trade in a range of $25-45 during the remainder of the year. Investors are advised to continue to fully emphasize quality government and other investment grade bonds in their portfolios. Whilst headwinds will persist during 2016, NBAD believes attractive investment opportunities will arise, for instance in selected emerging and frontier markets, and also especially within commodities. While a bear market in US equities is likely to unfold, this should lead to buying opportunities in other markets, some of which are already very depressed. Within MENA, for instance, UAE equities could easily be described as being oversold, and cheap in terms of valuation.

This article was first published on Saudi Gazette on Feb. 22, 2016.

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