The OPEC+ agreement earlier this month to increase oil supply will mean that downturns in hydrocarbon sectors across the GCC states will start to ease. London-based economic research and consultancy firm, Capital Economics, expects that brent crude will reach $60per barrel by the end of next year and the Gulf economies will start to benefit from higher prices.
On Friday, Brent crude settled up 76 cents, or 1.5 percent, to $52.26 a barrel after touching $52.48, its highest since March. OPEC+ plans to add 500,000 barrels per day of supply in January and will meet in early January to decide on next steps.
“This will help to rein in large budget and current account deficits and, in turn, ease any lingering strains on dollar pegs. Fiscal policy is likely to remain tight across much of the Gulf, but further aggressive austerity measures are unlikely. A key risk is that the growing acrimony among OPEC+ members escalates and the agreement falls apart, triggering another oil price war similar to that witnessed earlier this year,” William Jackson, Chief Emerging Market Economist at Capital Economics said.
The news of an effective COVID-19 vaccine is clearly welcome and several countries have already approved the Pfizer vaccine for emergency use. At the same time, outbreaks across the region now appear to be under control as national lockdowns in North Africa have curbed the number of daily new infections.
“In Saudi Arabia, Q3 GDP figures confirmed that the economy recovered as virus containment measures were lifted, but output still remains around 5 percent below its pre-virus level.
The UAE’s economic recovery should be among those that gets the biggest boost from a COVID-19 vaccine. There are already signs that the tourism sector is getting back on its feet. The Qatar blockade appears to be nearing an end, but this is unlikely to provide much of a boost to the economy,” Jackson said.
“In the rest of the Gulf, the boost from higher oil production will be welcome as non-oil sectors have continued to struggle with private sector credit slowing and tourism remaining weak. Meanwhile, deflation has persisted in Oman and Bahrain,” he added.
According to Capital Economics, Egypt’s COVID-19 has worsened this month and there is a growing risk that restrictions are tightened, which would further hold back the weak recovery. “Inflation jumped in November and we think that the central bank will leave interest rates unchanged at this month’s meeting,” Jackson said.
In the rest of North Africa, economic recoveries are struggling to get going as industry and tourism sectors in Morocco and Tunisia have been weighed down by the authorities’ strict containment measures. The Algerian authorities have continued to deplete their foreign exchange reserves to support the dinar.
Social unrest in Lebanon escalated this month after reports that subsidies on key goods like fuel and medicines would be revoked. Meanwhile, Jordan’s COVID-19 outbreak has improved, but the recent tightening of measures has weighed on economic activity, Capital Economics said.
By Seban Scaria