The International Monetary Fund’s latest assessment of the economies of the Middle East and North Africa is going to make for pretty grim reading in many of the region’s oil-rich nations on Wednesday morning.
It’s a brutal assessment of the slowing growth and the destabilising effect of low oil prices. Though the plunging costs of energy have been a positive thing for consumers in much of the world, that cash boost is effectively taken straight from the pockets of finance ministers in the Middle East.
According to the report, not a single one of the MENAP (Middle East, North Africa, Afghanistan and Pakistan) oil exporters is “saving enough of their hydrocarbon wealth for intergenerational purposes.”
They’re also heading for difficult waters in terms of their government budgets.
Only Qatar, Kuwait and the United Arab Emirates have strong enough fiscal buffers to last in the long term — each can hold off for over 20 years. But Oman, Algeria, Saudi Arabia, Bahrain, Libya and Yemen are all in a more worrying situation, with little more than five years of fiscal buffers left, before they’re going to be forced to run into debt.
That’s because the current price of a barrel of oil is well below their “fiscal breakeven” — the price at which their oil revenues make their government budgets balance. Take a look:
Fiscal buffers in this sense mean how long the countries can run down their assets before they have got nothing else to sell. In the case of Saudi Arabia, it’s buffered by colossal reserves of foreign currency. But those can last only so long if the government is constantly selling them to fund its spending, and insistent on keeping its currency firmly pegged to the dollar.
Here’s how the kingdom’s reserves look, according to a recent note from Oxford Economics:
The plunge in oil prices was a concerted effort by oil exporters, with particular support from Saudi Arabia and the Gulf states. Their deliberate overproduction, combined with a weakening of demand, has cut prices in half during the last year.
That’s had massive effects around the world, boosting retail spending in Europe and sending inflation figures negative across the advanced economies. But its intention was simple — to send the US oil producers which grew so rapidly over the last decade into retreat.
It’s working — companies like Schlumberger in the US are reporting absolutely dreadful results and much of the industry is being forced to cut back.
The question for the major oil producers in the Middle East is simple — can they hold out long enough to cripple US production, especially so that the industry can’t just bounce back straight afterwards?
The IMF doesn’t make a judgment on that — but it’s clear that holding out comes at a massive price.