Is the worst over for policymakers of the oil-exporting regions of the Arabian Gulf?
Just recently, with a sharp recovery in the oil price and a pickup in global economic activity, there are signs that the challenges facing oil-dependent governments in the region are ameliorating.
Earlier this week, Goldman Sachs, a long-time bear on the oil price, suddenly switched tack on the short-term prospects.
The oil market had “gone from storage saturation to being in deficit much earlier than we expected”, said Goldman.
That’s analyst-speak for saying there is now not enough oil in the world to satisfy demand.
In response, the oil price nudged towards US$50 a barrel, where it has not been since last November.
Admittedly, Goldman’s new-found optimism had a lot to do with production interruptions in Venezuela, Nigeria and Canada, all of which could be turned around pretty quickly.
But the US bank, whose gloomy forecasts of $20 per barrel had become a millstone for oil traders, will find it hard to go back to that bearish position.
Admittedly, $50 is not enough for budget-setters in most Arabian Gulf states. Most of the break-evens were regarded as being somewhere north of $70 for the most efficient producers and most advanced diversifiers, like the UAE.
It will still be a hard slog to get back to that level, but the trend is encouraging.
The other habitual doomster for the region, the IMF, was rather less optimistic about the medium-term prospects.
The organisation expects economic growth to hover around the 2 to 3 per cent level for the next few years, and warned that even this might be compromised if governments’ actions to balance their budgets was too drastic.
This warning seemed to produce an instant response. Moody’s Investor Services, the ratings agency, said that it expected Abu Dhabi to reduce the level of spending cuts this year from the draconian levels of last year – about 20 per cent, Moody’s estimated.
Maybe the prompt action to cut budgets back then has bitten too deep and was beginning to affect GDP levels too drastically, the IMF implied.
It also held out a bright message for the most diversified economy in the region – Dubai.
The IMF forecast that growth in the emirate would slow to 3.3 per cent this year – still a healthy rate of growth in the global context – and would accelerate to more than 5 per cent for the rest of this decade, as investment gears up of the Expo 2020 event and the Dubai Vision 2021 strategy.
It is not all good news. Moody’s also this week confirmed downgraded investment status on UAE sovereign debt, with negative outlook and lower ratings for five of the country’s biggest banks.
But the rater had to take into account the fiscal effects of 18 months of falling oil prices, which took a toll on the financial and liquidity positions of the big banks. All are still solid investment grade.
The message is that a lot of damage has been done, but there is still plenty in the kitty, and finally – with the recovering oil price – some light at the end of the tunnel.
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