I make no apology for using this column from time to time to reflect the views of Capital Economics (CapEcon), the London-based consultancy. CapEcon has called the region right for a long time, refusing to join the ranks of the habitual doom-mongers and instead producing a consistent stream of well-argued research that calls it like it is but does not get bogged down in prejudice or preconception.
Their analysts have been especially busy in the past week and produced several reports on Saudi Arabia, other Gulf countries and the energy outlook. Together, they make for a snapshot of the current state of the region in a state of challenge and transformation.
Probably the most significant was a paper last week under the title: “Saudi public finance figures suggest big spending cuts are over.” The context is the furor (exaggerated, in my opinion) that accompanied the announcement last month that the government was reinstating some benefits to public sector workers that had been scrapped last October.
I thought then that talk of a “U-turn” was overblown, and CapEcon agrees. On the basis of recently released figures from the Ministry of Finance that give a first-ever quarterly update on the Kingdom’s budget position, it could afford the benefits resumption and can even afford a further easing of “austerity” in the coming months.
The official figures show the deficit came in at SR26.2 billion ($7 billion) or around 4.3 percent of gross domestic product (GDP). That is still big for a country that until 2014 enjoyed many years of oil-fueled surpluses but it is a dramatic improvement on the position in the first three months of 2016 when the deficit was a shocking SR91 billion, or 15 percent of GDP.
The rising oil price over the past 12 months helped, of course, giving a boost to oil receipts. The cuts in production were more than offset by the rise in price, so the much-maligned policy pursued by the Saudi government and the Organization of the Petroleum Exporting Countries (OPEC) has had a positive effect after all.
Non-oil revenues also rose but only by 1 percent, a “disappointing” performance that CapEcon puts down to a drop in investment returns from the Saudi Arabian Monetary Authority (SAMA) and from the Public Investment Fund (PIF). That needs further elaboration at some stage.
On the cost side of the Kingdom’s account, there was a 2.5 percent fall in government spending but this compared with up to 25 percent in 2015-2016. “In short, the big spending cuts seem to be over. And we think there is scope for austerity to be eased further in the coming months,” CapEcon said.
Consumer spending in the spotlight: The big question now is whether consumer spending will reflect the easing of tight finances and get Saudi citizens spending again, which will be vital if the non-oil sector recovery is to continue. Much of that is down to consumer confidence and that is heavily influenced by the oil price.
On the oil front, CapEcon thinks it likely that the OPEC production cuts will be extended when ministers from oil-producing countries meet in Vienna later this month. That much was already in the market and has helped lift Brent above $50 at the end of last week.
But it is unlikely, the consultancy says, that OPEC will agree to any deepening of the cuts. There has been some speculation about this but it is probably unnecessary as current levels are deemed to be enough to bring global crude stock closer to the five-year average, which OPEC sees as the crucial criterion. It would also be politically difficult to get all oil producers, including Iran, Iraq and Russia, to agree to further cuts, raising as it does the specter from the 1980s of ever-deeper production cuts being chased all the way down by falling prices and declining economies.
The wild card here, of course, is US shale production. You can expect their growing levels of output to feature in the upcoming conversations between US President Donald Trump and Saudi Arabia’s leaders in the upcoming US state visit to the Kingdom, but only marginally. The Gulf countries are in a better position to withstand the continuing pain of lower oil prices than at any time over the past five years, CapEcon says. The mood in the Gulf is: Let shale do its worst – we are ready.
Finally, even against the generally positive background of the Gulf economies, CapEcon thinks one country stands out. The UAE is the “bright spot in the Gulf,” it said, because of the recovery of the non-oil sector, the easing of fiscal austerity, robust global economic growth, and the impetus starting to come through from preparations for the Expo 2020 event. The consultancy’s GDP forecasts are higher than the consensus and that of the International Monetary Fund (IMF), at 2.5 percent this year and 3.5 percent next. CapEcon has had a good track record in the past; time will tell if it is right this time. Maybe we will get further clarity when the IMF country teams deliver their verdicts later this month.