Kristian Rouz — Managing director of the International Monetary Fund (IMF) Christine Lagarde has said that the world's major oil exporters are yet to recover from the fiscal shock dealt by the massive drop in crude prices back in 2014.
Speaking at a conference in Dubai, UAE, Lagarde said the future of the international oil market does not appear to be unequivocally bright due to a combination of upside and downside factors. Lagarde warned oil-reliant economies against ramping up budget spending, saying their oil revenue might plunge again.
"Modest growth continues, but the outlook is highly uncertain," Lagarde said.
The IMF chief also said that over the past few years fiscal revenue in oil-exporting countries has improved, sparking an urge to increase budget spending among several national governments. Lagarde suggested such plans should be put on hold due to the lack of clarity of whither oil prices go in the near-to-medium-term.
"Fiscal deficits are only slowly declining, despite significant reforms on both the spending and revenue sides, including the introduction of VAT and excise taxes," Lagarde said. "This has led to a sharp increase in public debt, from 13 per cent of GDP in 2013 to 33 per cent in 2018."
Lagarde's remarks come in the wake of ambitious announcements from the governments of Saudi Arabia and the UAE, which both recently unveiled massive infrastructure and modernisation projects to ease their reliance on oil. However, IMF experts believe it's not the right time just yet, suggesting fiscal consolidation could be a better option.
In the UAE, growth in the non-oil sector is expected to accelerate to 3.9 per cent this year, and to 4.2 per cent in 2020, according to the IMF. Meanwhile, experts also pointed out that a recent rebound in oil prices has supported Emirati economic growth.
However, another possible crash in oil prices could deal some damage to the UAE, where many companies are now exposed to a higher level of debt than they were prior to the 2014 bust.
"Given Dubai's large public-sector debt, staff encouraged the authorities to be prudent when implementing recent revenue-reducing measures while containing current expenditure growth and executing the planned investment efficiently," the IMF said in its report.
Moreover, the IMF chief said that the Middle East's public sector debt-to-GDP ratio increased from 64 per cent in 2008 to 85 per cent last year. Lagarde also pointed out that in many oil-exporting countries public debt exceeds 90 per cent of GDP, with very little progress on the path of easing their reliance on crude.
IMF experts also said that rising oil output in North America and the ongoing improvements in oil infrastructure, including pipelines and seaports, in the US and Canada, could suppress international crude prices in the medium-to-long-term.
Lagarde also said an expected slowdown in global economic growth could reduce the demand for oil, which could reflect negatively on fiscal revenues across the Middle East. According to the IMF, the world economy will grow 3.5 per cent this year, a downward revision by 0.2 per cent from the body's October forecast.
"Unsurprisingly, a weaker global environment has knock-on effects on the region through a variety of channels — trade, remittances, capital flows, commodity prices, and financing conditions," Lagarde said.
In this light, the IMF chief believes that oil-reliant economies should prioritise structural reforms, financed with a greater degree of transparency, cautiousness, and accountability. Lagarde also suggested oil-producing nations could use the experience of Norway and Chile, which managed to protect their fiscal spending from volatility in energy prices through prioritised investment.
IMF experts also warned that the majority of export-reliant countries — not limited to oil producers — could face negative developments on the fiscal side due to the elevated tensions in global trade, and the ongoing realignment of international supply chains.