World Economy

Low Oil Weighs on Saudi, UAE Business

Low Oil Weighs on Saudi, UAE BusinessLow Oil Weighs on Saudi, UAE Business

The slump in oil prices is sapping growth momentum of private businesses in the two biggest Arab economies, according to a key indicator released on Tuesday.

The Emirates National Bank of Dubai Purchasing Managers’ Index for Saudi Arabia dropped for a second month in a row to 55.7 in October, the lowest level since the survey began in 2009, driven by weaker expansion in new business. The same measure for the United Arab Emirates fell to 54 from 56 in September, the lowest since April 2013, the Dubai-based bank said. Readings above 50 still signal expansion, while those below indicate contraction, Bloomberg reported.

Oil prices have dropped more than 40% over the last year, prompting some governments in the six-nation (Persian) Gulf Cooperation Council to plan spending cuts and curb or eliminate fuel subsidies. Non-oil economic growth in the region will slow to 3.8% this year from 5.5% in 2014, according to International Monetary Fund estimates.

In Egypt, business conditions also worsened at the quickest pace since February, PMI data showed, as a shortage in power supply and foreign currency continued to undermine output.

 Tighter Liquidity  

For Saudi Arabia, the biggest Arab economy, the slower growth in private industries last month is “unsurprising in the context of sharply lower oil revenues and tighter liquidity conditions,” Khatija Haque, head of Middle East and North Africa research at Emirates NBD, wrote. “However, the rate of expansion in the non-oil sector is still relatively robust.”

The Saudi government is already searching for budget savings, is contemplating project delays and has sold bonds for the first time since 2007. The country relies on oil for at least 80% of its revenue. While rates of growth in output, new orders and employment all eased, “the sector remained firmly in expansion territory overall,” Emirates NBD said.

 Egypt Needs Reforms

The drop in the UAE showed “slower, but still solid, improvement in business conditions,” with firms raising their output but cautious about purchasing, the report said.

In Egypt, the PMI gauge fell to 47.2 in October from 50.2 a month earlier. The shortfall in foreign currencies and power supply highlights “the need to implement a more concerted program of structural reforms to boost the economy’s short and long-term outlook,” said Jean-Paul Pigat, a senior economist at Emirates NBD.

Egyptian authorities have taken measures to conserve foreign currency, including limiting access to dollars to importers of vital goods. A hard currency crunch, however, persists, as receipts from tourism and foreign investment linger at levels lower than those seen before the 2011 popular uprising.

The PMI, which is seasonally adjusted, is based on data compiled from monthly replies to questionnaires sent to executives in 400 companies in manufacturing, services, construction and other non-oil sectors.