A myriad of macroeconomic factors are colliding this year to create a string of uncertainties that have worried energy producers around the world. It is still unclear how Beijing plans to manage China’s first major economic wobble in nearly three decades, subsidy cuts in Gulf countries that have long enjoyed oil wealth are still underway and the US has raised interest rates for the first time in a decade.
By Dyala Sabbagh
Partner at The Gulf Intelligence
A myriad of macroeconomic factors
are colliding this year to create a string of uncertainties that have worried energy
producers around the world. It is still unclear how Beijing plans to manage
China’s first major economic wobble in nearly three decades, subsidy cuts in
Gulf countries that have long enjoyed oil wealth are still underway and the US
has raised interest rates for the first time in a decade.
Plus, the Saudi Arabian riyal fell
to a record low against the US dollar in the one-year forwards market in
mid-January and state-owned Saudi Aramco, the world’s largest oil producer,
said it is eying an initial public offering (IPO) this year. Questions abound
over whether region’s economic Goliath is falling. Europe is still posting
minimal economic growth and the majority of the BRICS economies (Brazil, Russia,
India, China and South Africa) are struggling to find their fiscal feet.
All of these macroeconomic factors feed
into what underpins the character of the global economy - confidence. The
bearish sentiment means many investors that have typically rushed to funnel
cash into oil and gas projects are now tentative, including those in the Middle
East. Tightened budgets is one of the reasons behind Royal Dutch Shell’s decision
to withdraw from a $10bn development of the Bab sour gas reserves with Abu
Dhabi National Oil Company (ADNOC), while Total is reducing its global
workforce by 4,000 and the UAE’s Sharjah-based Dana Gas is cutting its
headquarter workforce by 40%.
Perhaps confidence in the
macroeconomic outlook will improve as the year progresses if China’s economy
stabilizes, the US’ plans to increase interest rates becomes clearer and the
subsidy cuts in the Gulf help boost coffers.
China’s Fiscal Transformation
The treasury of the world’s largest
economy faces a challenging year and energy producers are not immune, but
China’s outlook is not as bleak as global headlines suggest. The devaluation of
China’s currency, the yuan, last August fueled fears that China’s debt-driven
burst onto the global stage over the last decade could crumble and take the
bulk of Asia’s energy demand down with it. But the Chinese economy is still expected
to grow by around 7% in 2016 – albeit the slowest full-year growth since 1990 –
and Beijing’s double-freeze on China’s small stock market in early January
primarily affected sentiment, rather than actual business.
Beijing’s plans to start switching
to more sophisticated market reforms in 2016 could lead to a safer and
consumer-based economy – clarity that will benefit economies worldwide. Energy
producers in the Middle East are expected to benefit from China’s historical
trade links that has endured for over two millennia, as Beijing ramps up its
One Road, One Belt programme along the new Silk Road. Trade between the UAE and
China is already growing at 16% annually and China is now the UAE's second largest
trade partner – volumes stood at $54.8bn in 2014. Beijing’s aversion to wade
into regional politics will continue to charm trade partners like Oman, the UAE
and Iraq and the historic Sino-Iran trade accord will regain momentum following
the lifting of sanctions on Iran in January.
Saudi Arabia Enters Uncharted Territory
Saudi Arabia is entering uncharted
territory – budget deficits, subsidy cuts and initial public offerings are not
terms usually associated with the Kingdom. Saudi Arabia’s oil-centered economy,
where petroleum accounts for 80% of its revenues, will spend less this year,
rapidly trying to balance the weight of lower oil prices and the escalating
costs of the Saudi-led coalition’s first year of operations in the Yemeni war.
Financial pressures mean the Kingdom’s initial subsidy cuts, which saw petrol
prices rise by up to 50% in late-2015, could be deepened this year. So far,
Saudi Arabia’s forecast budget deficit of 326bn ($87bn) riyals equates to 16%
of GDP.
The possibility of an IPO of
state-owned oil giant Saudi Aramco is to many an indication of how the
cash-strapped Kingdom is looking to raise finances. Some energy professionals
counter that Riyadh’s vast foreign exchange reserves will protect the treasury
from the worst of the low oil prices this year, saying that Saudi Aramco’s move
reflects the country’s confidence and effort to introduce market reforms. A
third explanation is that the tentative IPO illustrates Riyadh’s attempt to
ring fence its market share by inviting international partners into the fold,
especially at a time when sanctions are lifted on Iran, the Kingdom’s main
competitor in the region.
US Interest Rates
The much-anticipated increase in US
interest rates – the first rise in a decade – will have far reaching
consequences in 2016, raising borrowing costs for both corporates and consumers
at a time when low oil prices are triggering budget deficits. Another hike to
interest rates is expected in March, so companies at home and abroad that have
not already factored in the change need to adjust quickly to the US’ new fiscal
landscape. Emerging market currencies are expected to move as they absorb the
shock, especially in emerging economies like Turkey, Malaysia and Brazil. But
the Philippines, India and Korea are likely to remain stable.
The low oil price combined with
rising interest rates marks the final straw for small and medium US shale oil as
many look to declare bankruptcy, curbing both shale production and new
infrastructure projects until oil prices climb above $50/bl again. The US has
5,000 drilled and unused wells that could bring another 4mn b/d of new supply
to the market at 100-200 b/d each – a welcome fiscal boost if oil prices
recover later this year.
Africa’s Middle Class Emerges
With many energy hubs in the Middle
East and North Africa beset by political strife, Gulf and Asian investors are
eyeing the largely stable democracies in the East African Community (EAC).
Tanzania, Kenya and Uganda are spearheading East Africa’s economic prowess;
growth forecasts for the region are 5.6% and 6.7% for 2015 and 2016,
respectively. Middle class households in eleven sub-Saharan African countries -
including Tanzania, Kenya and Uganda - are expected to more than double from
15m people to over 40m by 2030, according to Standard Bank’s research. The
subsequent economic growth and appetite for oil products from the continent’s
own reserves, Gulf and Asian suppliers, is vast.
The East African Community (EAC)
hopes to invest around $1.5bn to build 1,454km of intraregional and domestic
pipelines over the next few years. The longest pipeline will be the 784km route
through Kenya – Uganda – Rwanda, which should significantly bolster fuel trade
between the three countries. Tanzania, Kenya and Uganda are amongst several
East African countries addressing wobbly regulatory frameworks by establishing
bidding rounds – a more transparent way to allocate resources. Tanzania hopes
to use its 55tcf of natural gas reserves to become a liquefied natural gas
(LNG) exporter by 2025, while Tullow and Canada’s Africa Oil have identified
600m bls of oil reserves in Kenya’s South Lokichar basin.
Geopolitics
Economics and geopolitics are
permanent bedfellows and the year ahead sees major changes in both. The
political turmoil in the Middle East is unlikely to improve in the short-term,
with souring relations between Saudi Arabia and Iran adding a fresh dose of
uncertainty to a backdrop of war in Syria, Iraq and Yemen. Wars are costly and
the Yemen war in particular is weighing down Saudi Arabia’s economy as it spearheads
a coalition into a second year of air-strikes and fighting against the Houthis
in Yemen.
Saudi Arabia’s attention is also
firmly fixed on Iran’s economy, which has been honed by nearly a decade of
sanctions. The country's inflation rate has dropped from around 45% in 2013 to
10% in 2015 and while Iran lacks the economic might of Riyadh, it is highly
ambitious and has already built a network of relationships for potential energy
supply contracts that stretch into Europe, the Gulf and Asia. And outside of
the Gulf, geopolitics are putting a strain on Europe’s economy as an influx of
refugees squeeze budgets, especially in countries that are also grappling with
rising unemployment.
About The Author:
Dyala Sabbagh is a
founding partner of Gulf Intelligence. Formerly Mideast Bureau Chief for Dow
Jones Newswires and an international broadcast journalist who has presented the
BBC and CNBC signature Middle East business programs.
She is a much sought
after Moderator and Master of Ceremonies for government, corporate and charity
events across the region, that have included special guests U.S. President Bill
Clinton, Queen Rania of Jordan and Sir Bob Geldof. During her print and
broadcast career, Dyala has interviewed a cross-section of business and
political leaders.
Dyala started her career in banking with CSFB, and moved
onto media. She has a BSc. in Economics and History from the University of
London and an MA in Arab Studies from the School of Foreign Service, Georgetown
University, Washington D.C.
