JEDDAH — Plunging stock markets in the Gulf show investors are panicking about the prospect of $70 oil next year. But heavy state spending means most firms in the region, with the big exception of petrochemical producers, are likely to do just fine. The main Saudi stock index sank 4.8 percent on Sunday, bringing its losses from its September peak to 23 percent. Dubai's index is down 21 percent from this year's high. By contrast, the MSCI emerging markets index is down just 9 percent. Investors fear that if the price of Brent crude stays around $70 a barrel next year – down from around $115 in June – governments in the six-nation Gulf Cooperation Council will cut back their spending in line with shrinking oil revenues, which are their main source of income. State procurement budgets could be cut, subsidies removed and big construction projects slowed or cancelled. If that happens, corporate profits throughout the region would suffer. But many fund managers and economists say those fears are overblown. Even if oil stays at $70, two of the big GCC economies – Kuwait and Qatar – will still be running state budget surpluses and be under no major pressure to cut spending. The huge fiscal reserves built up by Saudi Arabia and the United Arab Emirates over the last several years will easily keep their spending high. “We assume that GCC governments will initially react to the lower oil price as a transitory terms-of-trade shock,” investment bank EFG Hermes said, looking at a $70-per-barrel scenario for 2015-2016. “Hence, they will generally assume a countercyclical policy stance, utilizing their existing financial buffers to offset the negative impact of the lower government revenues and export receipts on the economy over the short term.” According to Thomson Reuters data, Saudi Arabia has seen a significant downgrade, but that is almost entirely due to the petrochemical sector. The damage to petrochemical firms will be most keenly felt in Saudi Arabia, because such firms account for about a third of the Saudi stock market's capitalization. In the past three months, analysts have slashed their average earnings growth forecast for the Saudi petrochemical sector this year to 13 percent from 25 percent. They do not see much of a slowdown for other Saudi sectors, however. Their forecast for earnings growth across the entire stock market has dropped only slightly, to 12 percent from 17 percent; most of that fall is due to petrochemicals. The outlook for the total value of 2015 Saudi corporate earnings has been cut by 4 percent, mostly because of petrochemicals, but also because of a shock restatement of earnings at telecommunications operator Etihad Etisalat (Mobily) in early November. Excluding petrochemicals and Mobily, Saudi Arabia's combined 2015 earnings forecast has fallen just 1 percent since September. “Concerns over forthcoming government spending have negatively affected share prices of non-petrochemical sectors,” said Turki Fadaak, research and advisory manager at AlBilad Capital in Riyadh. However, “their revenues are not directly affected by declining oil prices. Accordingly, the drop in share prices constitutes attractive buying opportunities in these sectors.” Fadaak believes the Saudi government will maintain spending next year. The International Monetary Fund has estimated Saudi Arabia needs an oil price of about $92 a barrel to break even in its state budget. At $70, it will be in the red, but its fiscal reserves can easily cover that. Its original state budget for 2014 envisaged spending of 855 billion riyals ($228 billion); the government's reserves at the central bank in September – excluding its other assets – totaled SR801 billion. — SG/Reuters
