Oman, Bahrain ‘most affected’ by oil price slump

TradeArabiaNew Service

While lower oil prices affect all GCC countries, they do not react the same way, an industry expert GCC-logosaid, highlighting that Oman and Bahrain are the most affected, whereas Saudi Arabia, UAE, Kuwait and Qatar are less impacted.

The more resilient economies benefit from strong macroeconomic fundamentals, such as more diversification, solid financial buffers and greater integration with world trade, added Seltem Iyigun, Mena region economist at Coface, a worldwide leader in credit insurance.

The developed manufacturing and service industries in these markets allow less dependence on oil revenues, she explained.

GCC countries currently hold 30 per cent of the world’s proven oil reserves with Saudi Arabia in the lead (15.7 per cent), Kuwait (6 per cent) and the United Arab Emirates (UAE) (5.8 per cent). Together the GCC countries produced 28.6 million barrels per day in 2014, equivalent to 32.3 per cent of total global production.

Oil dominance on economic performance

GCC countries are projected to grow by 3.4 per cent in 2015 and 3.7 per cent in 2016. While these rates are considered high compared to other emerging markets, they remain below the region’s average growth rate of 5.8 per cent between 2000 and 2011.

The reason for the slowdown is the decline in oil prices, which have fallen from approximately $110 per barrel in mid-2014, to around $50 in 2015.

“While rising government expenditure, coupled with falling oil prices have impacted the GCC region, not all markets have reacted in this same pattern. Despite similarities in economic structures, the countries differ in terms of economic size, population, levels of diversification and fiscal break-even prices,” Iyigun explained.

UAE: resilient to lower oil prices

The UAE’s economy is one of the most diversified among the GCC countries, making it resilient to falling oil prices. Hydrocarbon revenues account for 25 per cent of GDP and 20 per cent of total export revenues. The non-oil private sector shows strong growth fuelled by domestic demand and tourism, especially in Dubai. According to Dubai Airports, in the first quarter of 2015, passenger traffic at Dubai International Airport jumped by 7 per cent to 19.6 million, with the influx of tourists expecting to grow further, in line with Dubai Expo 2020.

Domestic demand is powered by strong retail sales and rising confidence. Dubai’s retail sales, which rose by 7 per cent in 2014, are estimated to rise further, due to further increases in tourist numbers.  Dubai’s real estate market is burgeoning through foreign investment as well as wealth from the neighbouring Abu Dhabi.

Saudi Arabia: speeding up diversification

While 80 per cent of its export revenues and around 85 per cent of its budget revenues come from the oil sector, the Kingdom is speeding up its diversification process. The main driver of economic growth is strong government spending to fuel private consumption and the construction sector, which has posted a growth of 6.7 per cent in 2014.

The industry is projected to grow in 2015 as the government plans to invest in projects such as transportation infrastructure, energy, utilities and housing.

Diversification and global integration

The GCC economies are still dependent on the hydrocarbon sector as the main export and source of revenues. However, the local governments are trying to replace this growth model through economic diversification policies aimed at reducing their dependence on the oil sector. Revenues from the hydrocarbon sector have been used to boost growth in the non-hydrocarbon industries in the form of subsidies and government spending. Saudi Arabia, UAE and Qatar have been more successful in diversifying their economies compared to their GCC neighbours.

As a result of long-term economic plans in GCC countries, the share of the non-oil sector in the total real GDP is rising – and increased by 12 per cent to 70 per cent in the GCC countries between 2000-2013.  The local authorities have introduced measures to promote trade, and attract more foreign direct investment to facilitate economic growth.

Coface assesses that the food and beverage sector in UAE will benefit from the high-income domestic market, solid private consumption, a large population of expatriates with increasing demands, strong economic growth and the country’s position as a safe haven.

The UAE has been investing in the food processing industry; a total of $1.4 billion since 1994, especially in the dairy industry. The halal food segment is also continuing its expansion, and is projected to grow to $1.6 trillion by 2018, boosted by strong consumer demand for varied natural food choices.

In Saudi Arabia, the most promising industry is the automotive sector. Several original equipment manufacturers have established local entities in the country. The Saudi Arabian Public Investment Fund (PIF) is investing in an automobile manufacturing plant worth $1 billion with a production capacity of 150,000 cars a year by 2018.  The vehicle sector is expected to grow by 3.6 per cent in 2015 due to rising disposable incomes, favourable demographics and higher urbanization rates.

“As oil continues to be a major contributor to economic performance in the GCC, economic diversification is a vital for Gulf countries to ensure continued healthy growth. This has been showcased in Saudi Arabia and the UAE, which are driving sustained GDP growth through significant government investment in non-oil sectors. In UAE, the food and beverage sector is forecasted to grow by 36 per cent between 2014 and 2019, while KSA’s automotive industry is slated to rise by 5.2 per cent in 2015,” Iyigun said.

“In view of these growth figures, Saudi Arabia and UAE are setting a positive example of the importance of diversified economies as a means to offset the impact of lower oil prices, promote growth and avoid a fiscal deficit,” she concluded. – TradeArabia News Service