(P)GCC Firms Can Live With $70 Oil

(P)GCC Firms Can Live With $70 Oil
(P)GCC Firms Can Live With $70 Oil

Plunging stock markets in the Persian Gulf show investors are panicking about the prospect of $70 oil next year. But heavy state spending means most firms in the region, with the big exception of petrochemical producers, are likely to do just fine, a Reuters report said.

The main Saudi stock index sank 4.8 percent on Sunday, bringing its losses from its September peak to 23 percent. Dubai's index is down 21 percent from this year's high. By contrast, the MSCI emerging markets index is down just 9 percent.

 Investors fear that if the price of Brent crude stays around $70 a barrel next year - down from around $115 in June - governments in the six-nation (Persian) Gulf Cooperation Council will cut back their spending in line with shrinking oil revenues, which are their main source of income.

State procurement budgets could be cut, subsidies removed and big construction projects slowed or cancelled. If that happens, corporate profits throughout the region would suffer.

But many fund managers and economists say those fears are overblown. Even if oil stays at $70, two of the big (P)GCC economies - Kuwait and Qatar - will still be running state budget surpluses and be under no major pressure to cut spending.

The two largest (P)GCC economies, Saudi Arabia and the United Arab Emirates, will probably run budget deficits. But the huge fiscal reserves that they have built up over the last several years mean they will easily be able to keep spending high.

"We assume that (P)GCC governments will initially react to the lower oil price as a transitory terms-of-trade shock," investment bank EFG Hermes said, looking at a $70-per-barrel scenario for 2015-2016.

"Hence, they will generally assume a countercyclical policy stance, utilising their existing financial buffers to offset the negative impact of the lower government revenues and export receipts on the economy over the short term."

According to Thomson Reuters data, analysts have only marginally changed their average forecasts for 2015 corporate earnings in the UAE and Qatar over the last three months.

Saudi Arabia has seen a significant downgrade, but that is almost entirely due to the petrochemical sector.

Corporate earnings in the (P)GCC's two smallest states may be hit hard by oil at $70. Bahrain was already running a budget deficit when oil was above $100; Oman is now almost certain to slip into the red, and its fiscal reserves are relatively small.

The outlook for the total value of 2015 Saudi corporate earnings has been cut by 4 percent, mostly because of petrochemicals but also because of a shock restatement of earnings at telecommunications operator Etihad Etisalat (Mobily) in early November.

Corporate earnings in other big (P)GCC markets, where petrochemicals have smaller weightings, are likely to suffer less.