Good times for Oil States, ‘dangerous phase’ for global economy says IMF

While this is a ‘dangerous phase’ for the global economy the outlook for the Oil States, except those participating in the Arab Spring uprisings is positive in the short to medium term, according to the quarterly regional economic outlook published by the IMF today.

The GDP of Libya will fall by around 50 per cent this year. By contrast Saudi Arabian GDP will grow by 5.4 per cent and Qatar by nine per cent. Next year the prediction is for five per cent GDP growth in the kingdom and 8.4 per cent in Qatar. The UAE will manage 3.3 per cent growth this year and 3.9 per cent next.

Regional director Masood Ahmed said the Oil States unaffected by uprisings are benefiting from a combination of high oil prices, high oil production and a substantial boost in government spending. He noted that Saudi Arabia’s high oil output to replace lost Libyan production represented a net gain to the country.

Public spending surge

However, Mr Ahmed said that government expenditure has risen by a ’surprising amount’ and the breakeven oil price for these economies has increased to $80, leaving them vulnerable to falling oil prices. The rise in Saudi Arabian public spending is 25 per cent of GDP.

Deutsche Bank has oil prices averaging $85-95 a barrel this year and falling to $85 in 2012, so this breakeven point is getting close. Below that and the Oil States would be running deficits to finance their massive hikes in spending, mainly though not exclusively on increases salaries for nationals and social payments.

But this does leave the Oil States without unrest enjoying good times at a moment when the new IMF chief executive Christine Lagarde has warned of a ‘dangerous phase’ for the global economy. The high oil prices benefiting the Oil States are one of a long list of negative headwinds for the global economy next year.

Global headwinds

These include a credit contraction as European banks absorb bad debts like Greek sovereign debt, stagnation in the US economy and a slowdown in the Asian tiger economies. The IMF has downgraded its forecasts across the world from the relatively optimistic forecasts in the spring.

The countries impacted by the Arab Spring are expected to take longer to recover than often thought, particularly those like Libya, Yemen and Syria with natural resources. ‘Transitional economies with natural resources can take four to five years to recover if other recent examples are a guide,’ commented DIFC chief economist Dr Nasser Saidi.

‘There is the J-curve effect as things get worse before they get better,’ added regional economic guru Dr Henry Azzam. ‘The private sector in these countries is discredited by links to the former regime and corruption, and Islamists will tend to win the elections. We are going to have to learn to live with Islamic democracy. They manage it in Indonesia and Malaysia.’