Chance for Gulf economies to benefit from higher oil prices

Jihad Azour, director of the IMF’s Middle East and Central Asia department, told the Business Extra podcast last week that the current windfall from rising oil prices is “precious”.

For many, it is unexpected that we find ourselves in a time when oil prices have averaged above $100 a barrel so far this year, when the lows of the pandemic in 2020 are still so fresh in mind.

The conflict in Ukraine has caused prices to spike amid supply concerns. In April, the two global benchmarks, Brent and West Texas Intermediate, posted their fifth consecutive monthly gain. Since last year, the OPEC+ producer group has steadily increased its production.

Thanks to rising oil production and prices, a mini economic boom in the GCC countries is unfolding, with growth expected to be higher this year than the IMF had originally suggested. Saudi Arabia’s economy grew 9.6% in the first quarter of 2022 to record the highest growth rate in the past 10 years. Oman recorded a budget surplus of 210 million Omani riyals ($546 million) at the end of February, compared with a deficit of 457 million riyals a year earlier.

Inflation should not be as big a problem in the Gulf as it might be elsewhere. In addition, a recovery in the non-oil sectors is expected to continue at a strong pace next year, which will offset any potential slowdown in oil.

Avoiding complacency is crucial as many risks still hang over the outlook

This positive trend builds on the momentum that began at the start of last year and accelerated in the second half. The scenario has led the IMF to upgrade its outlook for this year for most GCC countries.

“I think it is perhaps important to understand how the recovery [from Covid-19] took shape last year. The policies that have been introduced in terms of vaccination, in terms of ecosystem adjustment… the different measures to support livelihoods, and also lives, have paid off,” said Mr. Azour.

“Thanks, for example, to the United Arab Emirates, Expo [2020 Dubai] as well as improvements in some legal frameworks like labor law, like the various measures that have attracted investors and labor, we see the economy accelerating the recovery of the non-oil sector,” he said. he declares.

Rising oil prices and production levels amplified the recovery, he said. The IMF estimates that oil exporters in the region will have an additional $1 trillion in reserves over the next three to four years. “I think what is important for the future is to understand that this windfall is very precious, which must be well invested,” he added.

Mr. Azour said that these additional reserves should be used to accelerate economic diversification, to further reduce dependence on oil revenues. The money should also be used to ensure the private sector can lead economic growth, he said.

In the UAE this month, for example, the expected auction of conventional dirham-denominated treasury bonds with a benchmark size of 1.5 billion dirhams ($400 million) will support broader diversification efforts. . The country’s banks, which are already posting rising profits, will benefit from higher interest rates. Real estate demand is also robust.

Stock markets have rallied and the MSCI GCC aggregate index posted its biggest quarterly gain since 2009. And Emirates airline says it plans to return to 100% network operations and capacity in 2023 as travel and tourism demand will pick up.

In the GCC, job creation rose 7.7% in the first quarter as hiring resumed in the public, legal, banking, consulting, real estate and cloud sectors, according to recruitment specialist Cooper. Fitch.

Overall, for the Gulf, the signs are positive despite the uncertainty caused by the war in Ukraine and inflationary pressures. It is therefore crucial to avoid complacency and to ensure that the opportunity for this windfall is not missed. Many risks still weigh on the outlook, including the repercussions of a global economic slowdown if rising prices and conflict persist. Additionally, China, the world’s second-largest economy and largest importer of crude, is grappling with an increase in coronavirus cases.

For the Gulf, to take advantage of this period of extraordinary growth, investments will need to continue in key areas such as energy transformation, climate action, technology, as well as the constant improvement of education and health.

It should be noted that in 2015 – only seven years ago – the IMF warned that oil exporters in the Middle East would face a combined budget deficit of $1 billion over five years, against a backdrop of price low crude. The current period of high prices and additional income is therefore “precious”.

Posted: 05 May 2022, 02:00 PM

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