HSBC's chief Middle East economist has stark message for regional budget-makers

The slump in oil prices has triggered a steep downturn in economic activity in the oil-producing countries of the Arabian Gulf that has “many years to run”, according to one of the leading economic analysts of the region.

In his latest quarterly report on the region, Simon Williams, chief economist for the Middle East at HSBC, wrote that oil prices would need to almost double to spark a significant economic recovery in the region.

“Only if oil prices rose back above $80 per barrel would we start to believe that the oil-dependent states’ broken economic model might yet return to life,” said Mr Williams.

The drivers of the economic slowdown are a monetary squeeze and fiscal consolidation “that policymakers can soften but not avoid, compounded by still high regional political risks that add to the cost of capital in a low-oil-price environment”, he says in the report entitled “Weak Foundations”.

Mr Williams has been among the more gloomy economic analysts on the Gulf, but he also has an unrivalled record of “calling” the regional economies, especially during the financial crisis of 2009.

“Oil at $40 still leaves earnings down more than 30 per cent year on year, and will deliver export receipts in 2016 close to half a trillion dollars below their 2012 cyclical peak. Indeed, oil prices at current levels do not even begin to cover the region’s oil-funded public spending or start to rebalance the exporter’s external account position. We expect every oil producer to record a budget deficit this year, with the aggregate GCC fiscal deficit running at $161bn – its highest-ever level,” he said.

There is some good news in the shape of the region’s deep financial reserves, he says. “We recognise that the wealth the region commands means the Gulf states are uniquely positioned to weather the slump in their energy receipts without experiencing either a fiscal or foreign exchange funding crisis”. He said that further increases in oil prices could change his outlook, nothing that his projections were based on averages of US$40 per barrel this year and $45 next year.

Regional economic policymakers will respond to the financial pressures on their budgets by a combination of spending cuts and increasingly through the introduction of taxes, he said.

“In addition to spending cuts, Gulf governments have also started to look to boost non-oil income through the expansion of their tax base.

“The most high-profile announcement was agreement among GCC leaders to implement a 5 per cent value-added tax across the region in 2018. Full details on the items that will be effected and the mechanism for cross-border revenue sharing have yet to be announced, and it is not clear if there will be any reduction in import duties as was proposed when the tax was first proposed a decade or so ago.

“But after a many years of discussion, policymaker commitment now appears strong, highlighting the Gulf governments’ greater readiness − and their enhanced capacity − to introduce controversial measures at a time of fiscal stress.”

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