S06 ORME 7 2016 Analysis 03_Layout 1 26/10/2016 10:54 Page 30
pipeline, making the region a global power player in the sector. In sum, energy price reforms affect inflation and economic activity. The IMF paper indicated that the inflationary impact should be small given the relatively low weight of energy products in GCC countries’ consumer price index (CPI). On heavy
industries, a gradual hike in feedstock prices would raise production costs for aluminum, steel, chemicals, plastics, mining, metals, gas processing and petroleum refining. These export oriented sectors would see depleting profits and the erosion of comparative edge. Thus, they would need to increase the efficiency of their production
process to remain competitive and to compensate for higher energy costs. Economy wide, other things being equal, higher fuel prices – as part of long-term structural reforms – could generate productive gains in terms of vastly improved energy efficiency and greater output diversification in the GCC countries. n
Who will survive the tide of reforms in the GCC? IN A NEW report, S&P Global Ratings explains why continued low oil prices – which have resulted in a number of rating downgrades in the Gulf Cooperation Council (GCC) – have led governments in the region to hone their focus on addressing fiscal deficits through expenditure reform. Such reforms will likely have both direct implications (via higher taxation and subsidy cuts), and indirect implications (weaker economic growth and demand for goods and services). The key points of the report, entitled Large GREs In The GCC With Important Mandates Are Better Positioned To Withstand Low Oil Prices are: • The energy subsidy reform across the GCC to deal with lower commodity prices and fiscal deficits has weakened the operating performance of downstream oil and gas companies to varying degrees, depending on existing contractual feedstock arrangements. Subsidy cuts are also increasing financial pressures on utility companies. SP expect the negative trend to continue over the short term, with larger oil and gas majors and national champions in the energy sector that count on strong government backing maintaining their credit quality, while smaller and
Issue 7 2016
midsize private operators are likely to experience the full effect of the weak environment. Exploration and production upstream operators are witnessing the greatest pressures on earnings, followed by downstream players. Relatively low feedstock costs continue to support the latter, even though profitability is squeezed or lower compared with previous years. Similarly, fiscal deficits have prompted tax increases for the telecom industries, although the performance of telecommunications operators is broadly stable, and continues to reflect growing subscriber bases and increased broadband penetration. The tough operating environment is expected to continue to hurt the real estate sector. S&P see some moves toward consolidation of major GREs, aimed at reducing cost and improving efficiency, given the more constrained circumstances of GCC sovereigns. Large fiscal deficits and high infrastructure needs could spur financial innovation in infrastructure funding.