Oil price rise bring welcome cash injection to oil powers

Rising oil prices are boosting economic growth throughout the oil producing economies of the Mena region, with predictions that GDP will largely return to pre-pandemic levels in 2022.

 

Atradius’ latest economic report on the Middle East and North Africa (Mena) acknowledges the importance of the growth in oil prices for the energy-exporting economies of the region. However, it also notes the limits to growth presented by an underdeveloped private sector and the ongoing downside risks to the economic outlook caused by the pandemic.

 

Oil prices are expected to level out at about $70 per barrel, with global demand for oil picking up. In the countries of the Gulf Cooperation Council (GCC) oil activity is expected to grow by up to 8% in 2022, a huge increase on the 0.5% recorded last year.

 

Many of the energy-exporting nations have also enacted strong vaccine strategies, which in turn has enabled them to lift lockdown measures and reopen domestic sectors such as retail and tourism.

However, despite a brief role when they led the economic recovery during the oil price shock, several non-energy exporting nations have now slipped behind their GCC neighbours when it comes to short-term growth predictions.

 

For Jordan and Lebanon, in particular, ongoing high Covid-19 infection rates are negatively impacting their economic rebounds and contributing to weak economic growth.

 

The development of the region’s private sector is also likely to have an impact on the size and speed of the region’s economic recovery. As the report outlines, without private sector reform, economic growth will slow.

 

This is true of most GCC countries where the share of the state-owned hydrocarbon sector dwarfs their various private sectors, but also in Algeria and Egypt where restrictions on imports and foreign investment, and a preferential treatment of state-owned companies over private companies in public tenders are additional factors that are stifling business.

 

Although vaccine programmes and the development of the private sectors are important for the region’s economy, growth is still heavily dependent on oil. Niels de Hoog, Senior Economist, Atradius, acknowledged that the world economy will still require energy from fossil fuels on a large scale for several decades. However, he noted that despite plans to expand the capacity of hydrocarbon production, many GCC nations are also investing in renewable energy.

 

He said: “Investments in renewable projects are being stepped up simultaneously to increase the share of domestic energy consumption that comes from renewable sources. The additional fossil fuel production will mainly be destined for exports.” At the same time, the rise in home-grown renewables is also changing the economic prospects of the region’s non-hydrocarbon producers for the better as they become less dependent on imported energy.

 

Schuyler D’Souza, Managing Director Middle East, Atradius said: “The Atradius Regional Economic Outlook for the Middle East and North Africa paints a varied picture. On the one hand we are seeing a rebound from the economic crises of the pandemic downturn and the oil price shock. However, on the other hand, additional factors are impacting projected growth in the region. Primary among these are the slow rate of vaccine roll-out in some of the economies and heavy dependence on state-owned hydrocarbon businesses. This picture may change over the next few years as some of the region’s countries expand investment in renewable energy and enable growth among the private sector.”