By Santhosh V Perumal/Business Reporter

Every $10 per barrel drop in oil prices shaves 3.4% and 4.2% of gross domestic product (GDP) off fiscal and current account balances, respectively, in the GCC (Gulf Cooperation Council) economy, according to Bank of America Merrill Lynch (BofAML).
The effects of lower crude prices seem significant. In EEMEA (Eastern Europe Middle East and Africa), the region most rattled by the oil shock, GCC will probably record twin deficits, BofAML said in its report.
“As such, we now forecast aggregate twin deficits for the Gulf region (-8.4% of GDP on the fiscal side and -3% of GDP on the external side),” it said.
The report found the GCC’s real GDP growth slowdown to 2.3% in 2015 against 4% in 2014 on account of flattish hydrocarbon production and softer non-hydrocarbon sector activity as fiscal policy is likely to turn more prudent.
The emphasis in the Saudi budget statement on funding of projects already ongoing suggests new ventures could be delayed, it said, adding tightening regional liquidity would make Dubai re-financings more challenging, according to BofAML.
Highlighting that the GCC’s macro story is likely to have peaked if oil prices stay low for long, it said the arithmetic of the growth model remains unfavourable without reforms.
The report said growth accounting highlights that real GDP growth since the 1970s has been driven largely by factor accumulation (labour and capital) and terms-of-trade gains. A prolonged oil price slump would be very likely to lead to the GCC’s public spending consolidation, although accumulated savings would cushion the adjustment in the near term, BofAML said.
Should fiscal pressure increase in a prolonged oil price slump, “we would expect capital expenditures to bear the brunt of the adjustment, as per historical experience. We would expect GCC governments to attempt to maintain current spending programmes. This should slow down investment but instead support consumption on a relative basis, in our view,” it said.
Expecting that in Egypt, the Gulf’s support may be less forthcoming at current oil prices; it said this means the Egyptian pound is likely to depreciate further in the near term. “We do not expect lower oil prices to have a direct material impact on real GDP growth as the oil sector is less than 15% of GDP. We estimate that a 10% drop in oil prices decreases fiscal subsidy costs by 0.45ppt of GDP, though the net fiscal savings are likely lower at 0.2ppt given that a portion of fiscal revenues are oil-related,” it said.
Brent crude prices have dropped by about 50% since June, it said, adding most of the oil plunge likely reflects oversupply.
Increasing output in Iraq and Libya caught out the market adapting to increasing non-Opec production, particularly in the US. Moreover, Opec’s (Organisation of the Petroleum Exporting Countries) decision to stand pat in late November added further momentum to the oil plunge.