‘GCC may need to re-calibrate strategies due to low oil prices’
MANAMA: GCC economies have to choose whether to accelerate the process of change, slow down or scale back in terms of development programmes aimed at diversifying their economies, finds a new report.
‘Impact of oil industry crisis on the GCC and potential responses’, by Deloitte explores different potential responses GCC countries can take to address the impact of the oil industry crisis on their economies.
Demand for oil has fallen by over 18 per cent since the beginning of the year, leading to a steep decline of more than 70pc in the price of oil.
The conflict over production levels within Opec+ and the reduced demand caused by the Covid-19 pandemic caused the global, sector-wide downturn in the oil and gas industry, leaving the oil-dependent economies vulnerable in terms of fiscal revenue.
“The oil industry is facing its gravest crisis in 100 years, leading to a steep decline in fiscal revenues for many countries in the GCC,” said Monitor Deloitte managing partner and regional energy, resources and industrials leader Bart Cornelissen.
“With the global economic downturn signalling lasting reduced oil prices, we looked at whether some countries in the region, particularly Saudi Arabia, would benefit from re-calibrating their visions by prioritising the most resilient transformation programmes to stimulate their future economies.”
The global economy is expected to shrink by more than 3pc in 2020, making this the worst economic downturn since the Great Depression.
Middle East economies are highly correlated with global macroeconomic trends and the region’s GDP is also expected to fall on par with the global average.
While oil revenues account for more than 50pc of GCC fiscal revenues – with the exception of the UAE, where oil accounts for about 35pc of the fiscal budget – the impact of the current crisis will spread across the entire GCC, finds the report.
Although 2020 GDP growth forecasts have been revised downwards from their pre-Covid outlook, fiscal budgets, highly dependent on the price of oil, continue to be based on a price that seems far from a longer-term reality.
The break-even price (BEP), or the minimum price per barrel needed to meet expected spending needs while balancing budgets, is far from the projected reality all across the GCC.
As a result of the direct link between oil prices, government budgets and economic activity, the budgets of GCC countries, particularly Saudi Arabia, will be critically strained owing to massive losses in annual oil revenue.
The report finds that GCC economies have different options with regards to their development programmes aimed at diversifying their economies.
It identifies four key dimensions with key questions to be considered in order to properly assess the various options and respond with resiliency.
The first dimension focuses on crafting the strategic direction of the transformation, the second dimension focuses on understanding the future fiscal position, the third focuses on navigating the required investment and policy enablers and the fourth focuses on laying out the future blueprint for governance and socioeconomic effects.
“Governments and leadership worldwide are being faced with the most difficult choices, each subject to multidimensional challenges and associated risk. The manner in which leadership responds in the next few months will be critical in maintaining, as well as boosting trust among all stakeholders involved,” added Mr Cornelissen.
