Oil price rise, Saudi law codification - Capital Economics
Middle East & North Africa Economics

Oil price rise, Saudi law codification

Middle East Economics Weekly
Written by James Swanston
The price of Brent crude has risen to its highest levels in over year this past week and, if this is sustained as we expect, the Gulf countries will benefit as OPEC+ eases its production quotas and stronger oil export revenues mean governments hold back from further harsh austerity. Meanwhile, Crown Prince Mohammed bin Salman outlined a wave of judicial reforms earlier this week that will help to address ambiguities in Saudi Arabia’s court rulings. This is a step in the right direction towards making the Kingdom more attractive to investors, but there is still a lot more work to do.

Oil at $60pb and the implications for the Gulf

Oil prices hit their highest level in over a year this week and, if this is sustained as we expect, the Gulf countries will benefit as oil output is raised and officials hold back from further harsh austerity.

Brent crude is currently trading at $61pb – a rise of over $10pb since the start of the year which takes it back to its pre-pandemic level. The Gulf economies stand to benefit via two main channels. First, while OPEC+ plans to maintain its current production quotas through to the end of March, ministers may be tempted at their meeting early next month to ease production quotas from April. Higher oil production would help to boost GDP mechanically via an increase in output in the mining sector, providing a lift to economic recoveries in the Gulf.

Second, the rise in prices (and higher output) will help to narrow twin budget and current account deficits. If oil prices stay at their current level for the rest of this year, we estimate that this would translate into a 45% rise in hydrocarbon export revenues from the Gulf compared with 2020. This would, on average, lead to an improvement in current account positions equal to 8% of GDP and help to ease any lingering near-term concerns over the sustainability of the region’s dollar pegs.

Budget deficits would also narrow and, in the case of Qatar and Kuwait, may even return to a surplus. This would reinforce our view that policymakers in the Gulf are unlikely to pursue further harsh austerity. Equally, though they are unlikely to loosen the purse strings and this will hold back recoveries in non-oil sectors. Of course, recoveries also hinge heavily on the rollout of COVID-19 vaccines. Worryingly, aside from the UAE and Bahrain, vaccination programmes are struggling to get going. But Chile’s experience serves as a reminder that programmes can get a jump start from the arrival of large batches of doses combined with good planning.

Saudi legal reforms a positive step

Proposed reforms to Saudi Arabia’s legal system will help to address ambiguities in the Kingdom’s court rulings and are step in the right direction towards making the Kingdom more attractive to investors. But there’s still a lot more work to do.

On Monday, Saudi Arabia’s de facto ruler Crown Prince Mohammed bin Salman (MbS) outlined a wave of judicial reforms. These centre on four new draft laws – a Personal Status Law, an Evidence Law, a Civil Transactions Law and a Penal Code for Discretionary Sanctions – that are expected to be finalised by the end of this year.

The Kingdom will continue to apply Sharia law, but it is hoped that these reforms will provide greater clarity over judicial rulings. Currently, judges in the Kingdom are granted a high degree of discretion over the interpretation of the law and, in the words of MbS, this has often resulted in “discrepancies in decisions” and “prolonged litigation”.

Reforms to Saudi Arabia’s legal framework are a step in the right direction and will help to make the Kingdom a more enticing prospect for investors, particularly foreigners. These reforms, after all, follow in the footsteps of other measures to improve the country’s business environment such as a new bankruptcy law approved in 2018.

But as we’ve argued before, there are plenty of other areas that still need to be addressed, such as lowering minimum investment levels, before investors come to the Kingdom in their droves. In the meantime, there is a rising risk that investment in the Saudi economy becomes overdependent on the Public Investment Fund and that this leads to a misallocation of resources that harms the economy’s long-run prospects.

The week ahead

Saudi inflation figures for January are likely to show that the headline rate picked up. (See Preview.)

Data Previews

Saudi Arabia Consumer Prices (Jan.) Tue. 16th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Consumer Prices %m/m (%y/y)

-0.2 (+5.3%)

+0.5% (+6.0%)

Inflation to drift higher over first half of 2021

We expect that Saudi Arabia’s headline inflation rate rose to around 6.0% y/y in January.

Inflation dropped back from 5.8% y/y in November to 5.3% y/y in December, its weakest reading since the VAT rate was tripled in July last year. This came on the back of a broad-based drop in prices – of the 12 major price categories, year-on-year inflation fell or was unchanged in seven.

We think that inflation rose to around 6.0% y/y in the first month of this year. Food and energy inflation is likely to have strengthened and core price pressures are likely to have edged up a touch too as domestic demand gradually improves.

Further out, we think that inflation will rise over the first half of this year, peaking at around 7.0% y/y, as the effects of the rise in global food prices and the rally in the price of oil on local transport prices filters on through. But the headline rate will drop sharply from July and stay at around 2% y/y over the course of 2021 and 2022 as the effects of the VAT hike drop out of the annual price comparison. (See Chart 1.)

Chart 1: Saudi Arabia Consumer Prices (% y/y)

Sources: General Authority for Statistics, CEIC, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

14th Feb

No Significant Data or Events

15th Feb

No Significant Data or Events

16th Feb

Sau

Consumer Prices (Jan.)

-0.2%(+5.3%)

+0.5%(+6.0%)

17th Feb

No Significant Data or Events

18th Feb

No Significant Data or Events

Selected future data releases and events

26th Feb

Leb

Consumer Prices (Jan.)

+8.1%(+145.8%)

+12.9%(+171.8%)

27th Feb

Jor

Consumer Prices (Jan.)

-0.3%(-0.4%)

+0.3%(-0.5%)

1st Mar

Bah

Consumer Prices (Jan.)

+1.1%(-1.9%)

+0.6%(-1.0%)

3rd Mar

Egy

Whole Economy PMI (Feb.)

48.7

Sau

Whole Economy PMI (Feb.)

57.1

UAE

Whole Economy PMI (Feb.)

51.2

4th Mar

OPEC

OPEC Meeting

8th Mar

UAE

Consumer Prices (Jan.)

+0.1%(-2.1%)

+1.8%(-0.3%)

10th Mar

Egy

Consumer Prices (Feb.)

-0.4% (+4.3%)

+0.7% (+5.1%)

11th Mar

OPEC

OPEC Monthly Oil Market Report

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Refinitiv, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World 1

2008-18

Ave.

GDP

Consumer Prices

2018

2019

2020

2021

2022

2018

2019

2020

2021

2022

Saudi Arabia

1.2

3.5

2.4

0.3

-4.3

2.3

6.3

2.5

-2.1

3.4

3.8

1.8

Egypt

0.9

3.9

5.4

5.5

1.0

6.0

6.3

14.4

8.6

5.2

5.8

4.5

UAE

0.5

2.8

1.7

3.0

-9.0

9.8

6.8

3.1

-1.9

-2.1

2.5

3.0

Algeria

0.4

2.8

1.5

0.8

-9.3

4.5

4.0

4.3

2.0

2.4

5.0

6.5

Morocco

0.2

3.8

3.0

2.3

-6.5

9.5

4.3

1.8

0.2

0.7

1.0

1.3

Qatar

0.2

7.4

1.4

-0.4

-2.8

4.5

4.3

0.3

-0.6

-2.6

1.3

2.5

Kuwait

0.2

1.1

1.2

0.4

-7.8

4.0

5.3

0.6

1.1

2.1

3.3

2.5

Oman

0.1

4.1

2.0

0.5

-7.3

7.0

2.8

0.9

0.1

-0.8

2.8

1.3

Tunisia

0.1

2.3

2.5

1.0

-8.0

8.0

3.5

7.3

6.7

5.6

5.3

5.8

Jordan

0.1

3.2

2.0

2.5

-1.5

2.8

2.3

4.5

0.8

-0.3

2.0

3.8

Lebanon

0.1

3.4

0.2

-3.0

-40.0

-10.0

6.8

6.1

2.9

84.9

59.0

9.5

Bahrain

0.1

3.8

2.0

1.8

-4.5

6.0

3.3

2.1

1.0

-2.3

1.0

1.8

Middle East & N. Africa2

4.0

3.7

2.7

2.0

-5.2

4.9

5.6

5.3

1.5

4.1

4.9

3.3

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates). 2) Regional inflation aggregate excludes Lebanon.

Table 2: Central Bank Policy Rates

Policy Rate

Latest
(11th Feb.)

Last Change

Next Change

Forecasts

End
2021

End
2022

Saudi Arabia

Reverse Repo Rate

0.50

Down 75bp (Mar. ’20)

None on the horizon

0.50

0.50

Egypt

Overnight Deposit Rate

8.25

Down 50bp (Nov. ’20)

Down 50bp (Q4 2021)

7.75

6.75

UAE

Repo Rate

0.75

Down 75bp (Mar. ’20)

None on the horizon

0.75

0.75

Algeria

Discount Rate

3.25

Down 50bp (Mar. ’20)

None on the horizon

3.25

3.25

Qatar

Deposit Rate

1.00

Down 50bp (Mar. ‘20)

None on the horizon

1.00

1.00

Kuwait

Discount Rate

1.50

Down 100bp (Mar. ’20)

None on the horizon

1.50

1.50

Morocco

Key Rate

1.50

Down 50bp (Jun. ’20)

None on the horizon

1.50

1.50

Oman

Overnight Repo rate

0.50

Down 100bp (Mar. ’20)

None on the horizon

0.50

0.50

Tunisia

BCT Key Rate

6.25

Down 50bp (Sep. ’20)

None on the horizon

6.25

6.25

Jordan

Overnight Deposit Rate

1.75

Down 100bp (Mar. ’20)

None on the horizon

1.75

1.75

Lebanon

Repo Rate

10.00

Down 200bp (Dec ‘09)

None on the horizon

10.00

10.00

Bahrain

1-week deposit facility

1.00

Down 75bp (Mar. ’20)

None on the horizon

1.00

1.00

Sources: Bloomberg, Capital Economics

Table 3: Currencies and Stock Markets

Currency

Latest
(11th Feb.)

Forecasts

Stock Market

Latest
(11th Feb.)

Forecasts

End
2021

End
2022

End

2021

End
2022

Saudi Arabia

SAR/USD

3.7508

3.7500

3.7500

TASI

8,940

10,850

13,050

Egypt

EGP/USD

15.58

16.00

17.00

EGX30

11,580

13,800

16,400

UAE

AED/USD

3.6728

3.6725

3.6725

DFMGI

2,634

2,975

3,500

Algeria

DZD/USD

132.5

160.0

170.0

Qatar

QAR/USD

3.6415

3.6400

3.6400

QSE

10,502

12,650

14,800

Kuwait

KWD/USD

0.3019

0.3040

0.3040

KWSE

5,695

7,000

7,000

Morocco

MAD/EUR

10.79

11.25

11.50

MADEX

9,437

9,950

10,000

Oman

OMR/USD

0.3840

0.3845

0.3845

MSM30

3,553

4,500

5,200

Tunisia

TND/EUR

3.27

3.60

3.80

TUNINDEX

6,642

7,150

7,250

Jordan

JOD/USD

0.71

0.71

0.71

ASE

1,733

2,050

2,350

Lebanon

LBP/USD

1505.7

7,500

7,500

BLOM

659

625

650

Bahrain

BHD/USD

0.3770

0.3761

0.3761

BHSE

1,463

1,850

2,100

Sources: Bloomberg, Capital Economics


James Swanston, MENA Economist, james.swanston@capitaleconomics.com