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Khatija Haque - Head of Research & Chief Economist
Published Date: 18 February 2022
In light of developments in the oil market since the start of this year, we have revised both our oil price assumptions and GCC production forecasts higher for 2022. We had assumed that OPEC+ would restrain production below their target levels to avoid over-supplying markets. However, given the tightness in oil markets in Q1 and the inability of some OPEC+ members to deliver their monthly production increases, we now expect GCC oil producers – who have the capacity to do so - to increase production to their baseline levels by the end of next year.
Both the higher oil price assumption and increased production are positive for GCC sovereigns, improving budget balances and resulting in higher headline GDP growth estimates for this year. However, we retain our view that governments in the region are unlikely to boost general spending as a result of the expected oil windfall, and will remain committed to diversifying both their budgets and their real economies away from oil over the coming years. Bahrain has pushed ahead with a doubling of its VAT rate this year to 10% while the UAE has announced a new corporate tax which will come into effect from mid-2023. Consequently, we do not expect higher oil revenues to feed through to significantly faster non-oil sector growth in the GCC.
While there will be additional money for investment in key strategic sectors, mainly through sovereign investment funds, higher petrol prices are likely to weigh on household consumption. A faster pace of monetary tightening in the US relative to our expectations at the start of this year is also likely to be a headwind to growth in the non-oil sectors of the GCC economies. As a result, we have kept our non-oil growth forecasts in the GCC largely unchanged, even as oil & gas GDP forecasts are revised sharply higher.
* Average GDP growth is weighted by nominal GDP
Source: Emirates NBD Research
Flash estimates of Q4 GDP showed growth slowed slightly in Q4 to 6.8% y/y from 7.0% in Q3 21. For the year as a whole, the preliminary estimates indicate growth of 3.3%, higher than our 2.5% forecast. Non-oil growth (both private sector and government services) was estimated at around 5.4% in 2021, slightly ahead of our 5% forecast. However, the hydrocarbon sector posted 0.2% growth last year, higher than our forecast for a -1.0% contraction.
For 2022, we had pencilled in an 8.5% increase in hydrocarbon GDP at the start of this year. We now expect Saudi Arabia to reach 10.6mn b/d of oil production by the end of this year from 10.1mn b/d at the end of January. This implies a 13% increase in oil production relative to average 2021 output of 9.1mn b/d, and we have revised up our oil GDP forecast accordingly.
With non-oil growth likely to slow to 4.0% off last year’s high base this implies headline GDP growth of 7.5% in Saudi Arabia this year, up from our previous forecast of 5.7% and consistent with the government’s own 2022 GDP forecast of 7.4% published in the 2022 budget.
As we have brought forward some of the oil production increase expected in 2023 into 2022, we have revised down our oil and headline GDP forecasts for 2023 to 2.0% and 3.4% respectively, down from 6.0% and 5.1% previously.
The higher oil price and production assumptions have also impacted our forecast budget balance for this year. We now expect the kingdom to post a surplus of 4.2% of GDP in 2022 (0.6% previously).
The UAE has significant capacity to ramp up oil production from current levels (2.9mn b/d at end January 2022) but we expect it to maintain the steady 20k-30k b/d increase we have seen in recent months for the rest of this year. This implies a 10% increase in crude oil production this year relative to average 2021 output of 2.7mn b/d. We have upgraded our oil GDP forecast to 10% in 2022 from 6% previously. With the non-oil growth forecast unchanged at 4.0%, this implies headline GDP growth of 5.7% in 2022, up from 4.6% previously.
Our 2023 GDP growth forecast has also increased to 6.1% from 4.9% previously, on the assumption that oil production will continue to rise to reach the UAE’s 3.5mn b/d baseline level by the end of next year. Our non-oil sector GDP forecast is unchanged at 4.5% in 2023.
Preliminary budget data for Q1-Q3 2021 show that revenues recovered by more than we had expected, up 17% on Q1-Q3 2020, while expenditure growth over the same period was just 1%. We have thus revised up our estimate for the full year budget surplus to 3.6% in 2021 from 1.2% previously. We also expect a larger surplus in this year’s budget than previously; we now estimate the budget balance at 4.1% of GDP this year, up from 1.5% previously.
Kuwait’s OPEC+ agreed baseline production level will rise to just under 3mn b/d from April 2022, from the current baseline of 2.81mn b/d. Kuwait’s actual production in January 2022 was just under 2.6mn b/d. We assume that the new baseline production level will be achieved by end-2023, which implies a 10% increase in oil GDP this year and 5% in 2023. Headline GDP forecasts are thus revised higher to 6.7% in 2022 and 4.1% in 2023.
Because Kuwait’s fiscal year runs from 1 April to 31 March, the upgrades to oil price and production assumptions have had an impact on budget projections for both FY2022 and FY2023. We have revised the budget forecast for the current fiscal year up to -10.5% GDP from -11.2%, and we now expect a budget deficit of -4.7% of GDP (-7.7% previously) for the fiscal year ending March 2023.
Oman is aiming to increase oil production to 1.05mn b/d this year according to the finance ministry, which implies a more than 6% increase in average oil production relative to 2021. If this production increase is achieved, and assuming a USD 78/b average oil price for this year, Oman could post a budget surplus for the first time since 2008. We have revised up our forecast for the budget this year to 0.9% of GDP from -1.8% previously. We have also revised up our growth forecast for Oman to 4.5% from 4.0% previously.
* Average is weighted by nominal GDP
Source: Emirates NBD Research
There are clear downside risks to these forecasts. A resolution of geopolitical tensions between Russia and Ukraine, and/or a return to the JCPOA allowing Iran to resume oil exports could result in a significant downward adjustment in oil prices, which could be compounded by increased non-OPEC supply. Such developments could deter OPEC+ from continuing to increase production towards their target levels by the end of 2023. However, if OPEC+ remains committed to gradually increasing production to baseline production levels then the GCC oil producers, along with Iraq and a few other OPEC+ members with excess capacity, stand to gain both in terms of their fiscal dynamics and headline GDP growth over the next two years.
The oil windfall that now looks likely in 2022 could certainly test the resolve of GCC governments to continue to implement sometimes difficult and unpopular fiscal reforms. In the event that higher oil revenues are passed on to businesses and households in the form of higher spending or increased subsidies, then this could result in faster non-oil growth than we currently expect over the next year.
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