GCC: OPEC plus decision is good for budgets, drag on growth

The surprise decision by OPEC+ to keep production largely unchanged in April came as a surprise to us, and the market.  As a result, we have revised up our forecast for average oil prices this year, and we have revised down our estimates for GCC oil production for this year, with some of the expected 2021 increase in oil production now pushed into 2022.

Budget deficits to narrow with higher oil prices

At our new Brent oil forecast of USD 67.5/b, average oil prices for GCC oil exporters will be 56% higher than in 2020, more than offsetting even the deepest production cuts in the region.  As a result, budget deficits are set to narrow sharply this year, assuming spending remains unchanged and governments continue to prioritise deficit reduction over boosting growth. 

Source: Emirates NBD Research

In the UAE, we estimate the budget breakeven oil price (the price at which the budget is balanced) is just under USD 66/b, assuming a 5% growth in spending from 2020 and 6.8% decline in oil production.  With Brent oil prices now likely to average USD 67.5/b, the consolidated UAE budget will likely be close to balanced this year, or record a small surplus.  There is thus scope for the UAE government to boost spending by even more than the 5% we have pencilled in for this year, in order to support the economic recovery in the non-oil sectors.  If the authorities did choose to increase spending, this would potentially boost non-oil GDP growth in 2021, offsetting the impact of the extended oil production curbs.

In Saudi Arabia too, we expect the authorities to prioritise reducing the budget deficit over increasing spending to boost growth.  Assuming government spending remains at the budgeted SAR 990bn, the budget deficit would narrow to -1.5% of GDP this year, compared with our previous estimate of -5.7% of GDP.  This would be the smallest budget deficit for Saudi Arabia since 2013. 

In Kuwait, where the parliament has yet to approve a new public debt law, a higher oil price this year would more than compensate for lower production and would significantly reduce the budget shortfall to -14.6% of GDP from a previously estimated -24.2% of GDP.

Bahrain and Oman (not OPEC members) would also benefit from the impact of higher oil prices on their budgets this year, with less pressure to introduce new taxes and cut spending further in the near term.

Downward revisions to headline GDP growth in 2021, and upward revisions to 2022

The decision to apparently target higher oil prices rather than gradually increase oil production this year will weigh on GCC GDP growth.  We had expected oil production in 2021 to be lower than in 2020, but the delay in increasing production means the contraction in oil sector GDP this year will be bigger than we had previously anticipated, weighing on overall headline GDP growth.  However, oil sector growth in 2022 will now likely be faster than previously expected, boosting headline growth rates for next year.   

Source: Emirates NBD Research

In the UAE, we expect crude oil production to be -6.8% lower than in 2020.  However, we have pencilled in a contraction of -3.5% for hydrocarbon GDP as we expect the government to continue investing in oil & gas infrastructure.  Indeed, preliminary data for H1 2020 showed 1% growth in hydrocarbon GDP despite crude oil production falling by -2% y/y over the period, which may be due to increased investment in the sector over that period.

We have retained our non-oil sector growth forecast of 3.5% in 2021, as PMI survey data in Q1 2021 has been relatively soft.  As a result, our headline GDP growth estimate for the UAE 2021 has declined to 1.4% from 1.9% previously.  However, our 2022 GDP growth forecast has been revised up to 4.3% from 3.4% previously, as the higher oil output we were anticipating this year is delayed to 2022.

In Saudi Arabia, the downward revision to oil sector GDP due to extended production cuts would result in headline GDP growth of just 0.7% this year, down from 2.5% previously. Once again, 2022 growth is likely to be significantly higher than the 3.6% we had expected next year, potentially reaching 6.8% on the back of an 11% rise in oil production.

In Kuwait, headline GDP is likely to contract slightly at -0.1% with a -2.5% decline in crude oil production, rather than our previous GDP forecast of 1.5% growth. In 2022, GDP growth is likely to accelerate to 7.3% however.

Upside risks to our growth forecasts

There are three key risks to these growth forecasts: compliance with OPEC restrictions may deteriorate, resulting in a smaller decline in average crude oil production this year relative to 2020; OPEC+ may decide to increase production more aggressively later this year; and governments could choose to increase spending to support the economic recovery in the non-oil sectors this year.

We think the first two risks - lower compliance with existing OPEC+ targets or a significant boost to OPEC+ production quotas later this year - are less likely.  However, we recognize that higher oil prices have in the past led to increased government spending and slippage on the fiscal reform front.  If GCC governments choose to roll back some of the fiscal adjustment measures introduced last year or to increase spending on the back of higher oil prices in 2021, then clearly our deficit forecasts will need to be adjusted wider again. 

The upside in this scenario would be faster non-oil growth in the region, which would be very welcome after an exceptionally challenging 2020.  However, the sustainability of a rebound in regional growth underpinned by higher oil prices is uncertain given the volatility in those oil prices.  Nevertheless, we note that the risks to our non-oil growth forecasts are skewed to the upside with oil prices likely to remain higher than we had anticipated at the start of this year.