Oil price drop rebalances ME economy

MUSCAT – Ziad Makhzoumi, the chief financial officer of Arabtec, the UAE’s biggest construction firm by stock market value, thinks the region’s economy will probably ride out weak oil prices comfortably. But he sees a risk.

If oil drops below the price at which energy-exporting countries in the Gulf can balance their state budgets - a scenario which he thinks unlikely - infrastructure and other building projects will slow down or in some cases halt.

Fortunately, "governments are more prudent and forecast better now than they did many decades ago, and can juggle things to maximise the use of limited funds or make their cash go longer," Makhzoumi told Reuters.
Across the Middle East, executives like Makhzoumi are wrestling with the implications of the plunge in oil prices over the last several weeks.

If the lower prices are sustained, or if oil falls further, it could be the most significant event for some economies since last year’s Arab Spring uprisings.

Cheaper oil may boost growth in some of the weakest states while cooling it in the booming Gulf energy exporters.

A saving of just 10 percent due to lower global oil prices could reduce Egypt’s budget deficit, estimated by the IMF at 9.8 percent of GDP this year, by nearly 1 percentage point - not enough by itself to solve the country’s financial problems, but an improvement which its jittery bond market would welcome.

In the Gulf, the oil price slide threatens to cool an 18-month economic boom that helped the region recover from the global financial crisis of 2008-2009. In addition to receiving lower oil prices, Gulf oil producers may have to cut the volumes they sell to prevent a deeper drop of prices.
So far, however, most Gulf economies look likely to continue expanding at comfortable rates with cheaper oil. In the wake of the recent slide in the price, the UAE’s economy minister Sultan bin Saeed Al-Mansouri last week cut his forecast for this year’s GDP growth to around 3 per cent, from the almost 4 percent which he predicted in March.

Any further drop in the oil price, if sustained, could slow growth further. But Gulf economies would probably remain far from recession.

There could be political as well as economic implications: some nations engulfed by the Arab Spring, such as Egypt, may find it easier to regain social stability. It may become harder for Iran to defy international sanctions designed to curb its disputed nuclear program.

Overall, said Liz Martins, senior economist for the MENA at HSBC in Dubai, the oil price drop could be good for the region, "by bringing the cost of oil down to a level which is more sustainable for everyone in the long term." – Reuters