Monday 17 February 2020
 
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'REFORMS NOT SUFFICIENT''

Oil demand decline a huge challenge for GCC: IMF

MANAMA, 10 days ago

Recent oil market developments reveal a strong and sustained declining trend in the global oil demand, which is now expected to peak in 2040 or earlier. This outlook spells a significant fiscal sustainability challenge for the GCC region, says a new International Monetary Agency (IMF) report.
 
The expected speed and size of the fiscal consolidation programmes in most GCC countries may not be sufficient to stabilise their wealth. These adjustments need to be accelerated and sustained over a long period of time, in line with the expected path of hydrocarbon revenue, says the study titled “The Future of Oil and Fiscal Sustainability in the GCC Region.” 
 
The oil market is undergoing fundamental change; new technologies are increasing the supply of oil from old and new sources, while rising concerns over the environment are seeing the world gradually moving away from oil. 
 
The combination of rising supply amid the global push to reduce reliance on fossil fuels is expected to continue, heralding what has been dubbed “the age of oil abundance”, the report says.
 
This spells a significant challenge for oil-exporting countries, including those of the GCC who account for a fifth of the world’s oil production, says the report.
 
The GCC countries have recognised the need to reduce their reliance on oil and are all implementing reforms to diversify their economies as well as fiscal and external revenues. Nevertheless, as global oil demand is expected to peak in the next two decades, the associated fiscal imperative could be both larger and more urgent than implied by the GCC countries’ existing plans.
 
At the current fiscal stance, the region’s financial wealth could be depleted by 2034. Fiscal sustainability will require significant consolidation in the coming years. Its speed is an intergenerational choice. Fully preserving current wealth will require large upfront fiscal adjustments. More gradual efforts would ease the short-term adjustment burden but at the expense of resources available to future generations, it says.
 
Anticipating and preparing for what comes next will be critical for oil-exporting regions. Oil remains critical to both external and fiscal revenues and overall GDP of the GCC states.
 
A legacy of sharply rising fiscal expenditure during 2007–14 followed by a steep decline in hydrocarbon revenues have weakened fiscal positions in the GCC region. The decline in oil revenues sparked a period of intensive reforms, including sizable fiscal consolidations. Nevertheless, the effect of lower hydrocarbon revenue is yet to be fully offset. The resulting fiscal deficits have lowered the region’s net financial wealth during 2014–18, the report says.
 
A path of prolonged deceleration in hydrocarbon revenue growth would add to this decline in wealth. At the current fiscal stance, the region’s existing financial wealth could be depleted in the next 15 years, warns the report. 
 
Although the importance of non-oil sectors has increased in recent decades, many of them still rely on oil-based demand either in the form of public spending of oil revenue or private expenditure of oil-derived wealth. The 2014–15 oil price shock, which notably slowed non-oil growth in most of the region, was a stark reminder of this dependence, it says. 
 
Recognising this challenge, the GCC countries are all implementing programmes to diversify their economies as well as fiscal and external revenues away from oil. The success of these programmes will be central to achieving strong and sustainable growth in the years to come, says the report.
The report estimates that growth of global oil demand will significantly decelerate, and its level could peak in the next two decades. In assessing the long-term oil market prospects, it is useful to look beyond the geopolitical and cyclical factors and focus on trends that are robust to temporary shocks. 
Growth of global demand for natural gas is also expected to slow, although it is expected to remain positive in the coming decades.
 
The fiscal policy need implied by this challenge is both larger and more urgent when compared to GCC countries’ existing plans. In the context of broader goals of sustainability and sharing of exhaustible oil wealth with future generations, all GCC countries have recognised the lasting nature of their challenge and are already planning continued fiscal adjustment in the context of their broader strategic long-term visions. 
 
Managing the long-term fiscal transition will require wide-ranging reforms and a difficult intergenerational choice. Continued economic diversification will be important but would not suffice on its own. Countries will also need to step up their efforts to raise non-oil fiscal revenue, reduce government expenditure, and prioritise financial saving when economic returns on additional public investment are low. While fiscal starting positions are still strong in a global context in four of the six GCC countries, the longer-term fiscal challenges are substantial, the report adds. - 
TradeArabia News Service
 



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