Higher oil prices ease budgetary woes

Reuters

• Demand collapsed due to the pandemic but rose with Ukraine conflict 
• Saudi, with a breakeven oil price of $79 a barrel, enjoys bounty
• Iraq’s monthly oil revenues hit $11bn, a 50-year high

Surging oil prices in 2022 mean most Middle East and North African (MENA) oil producers can look forward to recording a surplus this year – often after running budget deficits and, on occasion, plundering their sovereign wealth funds.

In 2020, as demand collapsed on the back of the pandemic, Brent crude averaged just $42 a barrel, forcing governments into the red. 

This year, the Ukraine conflict has triggered a huge reversal in energy prices. During the first quarter, Brent crude prices rose 29 per cent quarter-on-quarter, to reach an average of $103 a barrel, the highest quarterly average since the third quarter of 2014.

• Saudi ramps up July oil prices for Asia buyers

In its latest economic outlook for the MENA region, the IMF forecasts oil prices will average $106.83 a barrel in 2022 and $92.63 a barrel in 2023. The projections are above fiscal breakeven prices for most regional oil exporters.

The fiscal breakeven oil price is the level at which the oil price needs to average for the country’s budget to remain in the black.

All the MENA oil states, with the exception of Iran, Bahrain and Algeria, have a fiscal breakeven oil price lower than the expected average oil price in 2022, which should make them more comfortable in loosening their purse strings.

Saudi Arabia

Saudi Arabia, which the IMF estimates will have a breakeven oil price of $79 a barrel this year, is set to enjoy an oil income bounty this year. Riyadh-based Jadwa Investment sees budgetary revenues exceeding expenditure by SR 298m ($79.5m) in 2022, leaving a positive fiscal balance of 7.8 percent of GDP. Jadwa forecasts a 5 percent overspend on budget levels, leaving total expenditure of SR 1 trillion. 

“Comments from Saudi Arabia’s finance minister this week provide some hints that the fiscal purse strings could soon be loosened if oil prices remain elevated,” said James Swanston, MENA economist at Capital Economics. “The longer that oil prices remain high, the greater the likelihood that fiscal policy will be loosened.” 

Around the Gulf 

The UAE’s breakeven oil price is projected to be $76 a barrel this year. Kuwait, which traditionally maintains a cautious approach to capital spending, has the lowest breakeven oil price at $52.5 a barrel, followed by Qatar at $56 a barrel. Oman’s breakeven oil price this year is $73 a barrel.

Iraq

Given Iraq’s heavy dependence on oil revenues, the 2020 pandemic year was particularly devasting for the country. But the recent spike in oil prices has led to a dramatic change in fortunes. In March, Iraq’s monthly oil revenues hit $11bn, the highest level in 50 years. Its fiscal breakeven oil price is $75.9 a barrel. Despite the revenues flooding in, the country remains in a political impasse. Since parliamentary elections were held seven months ago, it has been unable to agree on the formation of a new government. Much of its oil windfall will be used to service a bloated public sector payroll.

Bahrain

Bahrain, the most resource-weak of the GCC states, has a breakeven oil price of $127 a barrel. In 2018, Manama adopted a fiscal reform programme intended to balance the country’s books by 2022, having been in the red since 2008. As a result of the pandemic, that date has since been pushed back to 2024.

Algeria

Algeria has the second highest fiscal breakeven oil price of all the MENA oil producers at $162.1 a barrel. Its breakeven oil price has almost doubled from $88.5 a barrel last year, marking a sharp deterioration in the country’s fiscal position. 

Algeria’s situation is unusual in that it is a major natural gas and oil exporter, but is also highly dependent on agricultural imports, the cost of which have increased since the start of the Ukraine conflict, along with energy prices. The government has seen its food and fuel subsidy bills soar as a result. Inflation is forecast to average 7.5 percent in Algeria this year and the risk of social instability remains high. Subsidies in Algeria account for more than 8 percent of GDP, according to Fitch Solutions.

Libya 

Both Libya and Kuwait have moved to a more conservative fiscal stance compared to two years ago. The former’s $141.7 a barrel breakeven price in 2020 has been reduced to $68.6 a barrel this year as greater political stability has enabled the authorities to start thinking about more efficient budgeting. However, with fuel smuggling and lower oil production eroding Tripoli’s financial resources, and the country spending upwards of $2bn a year on fuel imports, Libya is expected to overspend on its budget.

Iran

Iran’s breakeven oil price, which in 2021 reached more than $300 a barrel, puts it well out of the MENA median range. This reflects the country’s fiscal crisis in which revenues have been eroded by the sanctions placed on oil exports – its major hard currency earner. Iran’s budgets are typically based on hugely optimistic assumptions. For example, its 2021/22 budget, which ended in March, was based on assumed oil exports of 2.3 million barrels a day (b/d). In reality, its actual oil sales – of which China is the main customer – are estimated to be less than 1 million b/d. In a sign of a more realistic fiscal approach under President Ebrahim Raisi, the 2022/23 Iranian budget is based on oil exports of 1.2 million b/d, and an average oil price of $60 a barrel. 

Reducing dependency on oil

Some countries are doing their best to wean themselves off oil revenues and reduce their budgetary dependence on high oil prices. In Bahrain, Fitch expects the government’s Fiscal Balance Programme, which mainly involves cutting spending and removing subsidies, to help lower the fiscal breakeven price from its current three figure number, but expects it will remain elevated, underlining an ongoing vulnerability to oil price volatility. Despite Bahrain’s limited oil production, its dependence on hydrocarbons sales is high at about 70 percent of government revenue. 

Oman too has implemented reforms to bridge its budget gap, which in 2021 reached OR1.2 billion ($3.1 billion), including the introduction of a 5 percent value-added tax last year, following the lead of the UAE, Saudi Arabia and Bahrain. The UAE is in the process of developing further non-oil related sources of income, with a 9 percent corporate income tax due to come into force from June 2023. 

The World Bank warns in its regional economic update released in April that while fuel exports play a hugely important role in the MENA economies, the long-term expectation is for lower oil prices, in line with the energy transition away from oil. The long-term challenge of declining hydrocarbons revenues, therefore, remains front and centre, it says. 

Fiscal breakeven oil prices ($ per barrel)

	2020	2021	2022*
Algeria	88.5	111.1	162.1
Bahrain	119.2	128.9	127.5
Iran	241.9	306.4	266.9
Iraq	55.2	61.4	75.9
Kuwait	79.8	68.6	52.5
Libya	141.7	51.9	68.6
Oman	87.9	71.6	73
Qatar	54.3	55.1	56
Saudi Arabia	76.6	85.1	79.2
UAE	60.1	69.2	76.1
*projected
Source: IMF