Strategy Note / Global

Saudi and GCC ugly fiscal truth from low oil prices

  • Fiscal breakeven oil prices range from Qatar (42) to Oman (104), according to latest IMF forecasts published this week
  • Most, including Saudi, are at least bringing down fiscal breakeven in 2021 but Kuwait and Oman are not
  • Reinforces our views: GCC not a risk-off safe-haven and Qatar best for those who doubt non-oil diversification efforts
Saudi and GCC ugly fiscal truth from low oil prices

In its latest regional outlook published this week, the IMF estimates fiscal breakeven oil prices for 2020 and 2021 for the exporters in the Middle East and Central Asia. The range in 2020 is spanned by Qatar (US$42 per barrel) at the low end and Oman (104) at the high end.

At least, most in the GCC region are forecast to bring down their fiscal breakevens in 2021, eg Saudi drops from US$78 (with a c11% fiscal deficit) in 2020 to US$68 (6% fiscal deficit) in 2021. The exceptions are Kuwait (from 65 to 66) and Oman (from 104 to 109).

Reinforces our caution on GCC

  • The GCC does not represent a safe haven during risk-off periods for investors – while the US$ pegs are resilient for all in the near term, the failure to address high fiscal deficits will stress them in countries like Oman before too long, the dependence on the recycling of oil revenues into public sector spending and employment, directly and via related sectors, is unsustainable with persistently low oil prices, and the diversification efforts are generally slow and running up against the barrier of uncompetitive operating costs (without government subsidy) and duplication;

  • The relatively resilient equity market performance this year (excluding Dubai) runs counter to the fundamental deterioration in the region's outlook wrought by persistently lower oil prices – MSCI GCC is down merely 2% ytd (likely flattered by the index inflows related to MSCI index changes, most notably the looming December 2020 inclusion of Kuwait, 11% weight in MSCI GCC, into the global EM index), and valued on trailing price/book on 1.8x (for merely 9% ROE), an 11% premium to the five-year median, and on forward price/earnings of 21x (for negative 7% one-year forward earnings growth) ;

  • Qatar is the most resilient part of the GCC, because of its very deep sovereign wealth resources relative to its very small population (over US$1m of FX reserves and sovereign wealth per citizen), particularly for those who doubt the prospects of non-oil diversification efforts across the region; and

  • Dubai's continuing real estate price declines (in its fifth consecutive year of declines with another 5-35%, depending on segment, of new supply likely, assuming delays, over the next five years) despite previously taboo reforms (eg long-term residency visa and expatriate citizenship) sends a worrying signal for others in the GCC who delay reforms and are pursuing a similar model of diversification.

Related reading

Dubai real estate prices falling fifth year in a row and still not bottomed (Oct 2020)

GCC-Levant equity strategy slide pack (Aug 2020)

GCC-Levant equity strategy: Old models under stress (Jul 2020)

GCC blockade 3 years on: Qatar is best for those who doubt the GCC can diversify (Jun 2020)

Saudi and GCC currencies: Drop the pegs while FX reserves still comfortable? (May 2020)

Saudi pares fiscal deficit, hits consumer, prepares for long oil war, splits GCC (May 2020)

GCC: The Gulf is not a safe haven unless (at least) oil prices recover (Apr 2020)

GCC: Sovereign wealth warning from the IMF (again) (Feb 2020)


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