The recognition of the scale of COVID-19 as a global pandemic came just days after OPEC+ failed to agree on extending product cuts that had been in place since 2017. The combination of factors pushed oil prices down to their lowest in decades, with Brent crude futures touching a low of $16/barrel, a quarter their pre-crisis level.
The OPEC+ countries managed to come together in April and agree to a new and much more extensive round of cuts, in an effort to rebalance the market. The new cuts committed countries to a 23% cut in output for May and June 2020 relative to an October 2018 baseline (also used in the previous two rounds of cuts), the cuts will ease to 18% for the second half of 2020 and then 14% throughout 2021. The scale and duration of the agreement is unprecedented. However, it has not been enough to compensate for the short-term demand shock from lockdowns and so Saudi Arabia has voluntarily reduced its production by a further 1m b/d for June (to 7.5m, more than a third below its peak output of 12m in April) and some other Gulf states have also made further cuts.
Even with the OPEC+ deal, the oil price outlook remains weak, with the most recent Reuters poll of economists forecasting an average price of just $36/barrel this year, down from $64 in 2019 and only slowly rising to $59 by 2024. Prior to the crisis, most Middle East states were running deficits even with oil at $64, some of them very sizable, and so the new environment is extremely challenging.
There are a wide range of scenarios for the overall fiscal outturns, which depend on a combination of the hit to oil revenue, the policy changes discussed on the previous page, and the impact of the crisis on non-oil revenue. Benchmark forecasts from the IMF and World Bank see the aggregate deficit for the GCC more than doubling to around 10% of GDP. These forecasts were made in early April, just before the renewed OPEC+ cuts and so if it doesn’t provide a sufficient boost in prices to offset the reduced output then they might underestimate the total hit to oil revenue. The evolution of the epidemic and the fiscal response since then may also differ from the Fund and Bank’s expectations. However, more recent forecasts from other sources, such as rating agencies, see a broadly similar net fiscal impact.
Both multilaterals also forecast smaller increases in deficits for the rest of the Middle East, which is less tuned to oil but which entered the crisis with a weaker fiscal position than the GCC. (The full IMF forecasts by country are shown in the data table on the final page.)
When it comes to GDP, there are larger differences between the IMFand World Bank forecasts, which see the GCC contracting by -2.8% and -0.4% respectively in 2020. However, there were similar differences in their previous round of forecasts in October and both see a similar magnitude of impact from the crisis. Most of the weaker growth in their forecasts comes from the lockdown impact on the non-oil sector (given that the forecasts pre-date the OPEC+ cuts). The IMF’s forecasts see a -4.3% contraction in the non-oil sector, nearly 8 percentage points below its pre-crisis forecast of 3.6% growth. This is comparable to its forecasts of the COVID-shock on Advanced Economies. If the OPEC+ cuts are fully applied then GCC oil production will be about 9% less than it was in 2019, which could knock about a further 4 percentage points off total real GDP, on top of the IMF/World Bank forecasts.
Looking ahead to 2021, there should be a significant rebound in non-oil sectors, as lockdowns end and demand recovers, although oil production will only be slightly higher y/y. The biggest uncertainty for 2021 is the oil price. The consensus forecast of $46 would be an improvement but still far below achievable fiscal breakeven levels for most countries. However, a wide range of prices are currently easily conceivable and leading economies forecast a range of $40-60. The lower case is easily conceivable if the OPEC+ deal breaks down or there is a second wave of infections and lockdowns, while the higher case is also plausible if an effective coronavirus vaccine leads to a V-shaped recovery in global oil demand.
Although the oil market has always been volatile, it is unusual to see such a wide range in forecasts. This uncertainty makes planning very difficult for both governments and for companies that are heavily driven by government spending. It also impacts the non-oil exports in the region, such as Jordan and Lebanon, whose economies are heavily influenced by trade, tourism and remittances from the Gulf. Hopefully by the time of our next Economic Watch report there will be greater clarity on the outlook.
Middle East Senior Partner, PwC Middle East
Clients and Markets Leader, PwC Middle East
Middle East Chief Economist, PwC Middle East
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