The 2019 budget is expansionary as the pace of austerity eases, spending increases, said the Bank of America Merrill Lynch (BofAML) in a new report, noting that the fiscal impulse in 2019 would push non-hydrocarbon real GDP growth up by c0.6-0.9ppt (percentage points) all else being equal.

The medium-term fiscal spending path also consistently crawls higher, added the report titled “The World at a Glance”. The higher spending is likely to put a floor under non-oil private sector growth, but the impact labour market reforms suggests no major rebound.

The gradual and sticky move higher in the fiscal breakeven oil price, coupled with the relative erosion of fiscal buffers since 2014, increases the economic vulnerability to a sustained drop in oil prices. 2019 budgeted revenue numbers are consistent on our estimates with an internally budgeted oil price assumption of c$80 per barrel (/bbl) and oil production at 10.2 million bpd. The budget itself would break even at c$93/bbl.

“We estimate the government's medium-term framework is now budgeting for oil prices to average c$83/bbl over 2020-23, and increase to c$86/bbl in 2023,” BofAML said in the report.

“We keep our estimate of $60/bbl as the minimum oil price required to support an adjustment of fiscal imbalances towards mid-single digits over the medium-term, assuming reforms continue to plan. We continue to expect near-term political and policy-making continuity. Financially significant US measures remain unlikely.”

“We expect growth to have bottomed out at the expense of looser fiscal policy. The USD peg is likely to hold on the back of still-high savings and oil prices. The government intends to support activity through: (1) a gradual pace of fiscal reforms; (2) rollover of Household/Cost of Living Allowances and Private Sector Support; (3) introduction of structural reforms; and (4) mega-projects,” the report said.

Crude oil prices have fallen below forecasts

“Oil prices also dropped on the back of a fundamental oversupply problem. Saudi, Russia, UAE, and the US all maximized output in 4Q18. Then, the Trump administration surprised the market by issuing more Iran export waivers than expected,” the report said.

“But now the 1.3 million b/d surplus in 4Q18 is starting to reverse. As OPEC cuts output, we project a slight deficit for the balance of 2019. With investor positioning reflecting a bearish set-up, Brent prices have already bounced back above $60/bbl, and we retain our $70/bbl average forecast for 2019.” – TradeArabia News Service