Weekly GCC news to 4 Oct: Oil spikes on Israel-Iran conflict, Oman upgraded

• Oil has spiked by 9% to $78 amidst concerns about a widening Israel-Iran conflict [see (1) below].
• Saudi Arabia revised down growth and fiscal forecasts, seeing deficits of -2.8% of GDP in 2024-27 (more here).
• The Saudi PMI rebounded to the highest since May; Kuwait’s returned to mild expansion; the UAE’s dipped slightly.
• Saudi FDI was disappointingly flat at 1.1% of GDP in Q2, but unemployment fell to a record low of 7.1%.
• Construction restarted after seven years on a 1km tower in Jeddah, set to be the world’s tallest.
• Abu Dhabi’s non-GDP growth rebounded to 6.6% y/y in Q2, led by construction, finance and transport.
• Adnoc finalized a €11.7bn deal to buy German chemicals firm Covestro.
• Qatar Airways is seeking to buy 25% of Virgin Australia, filling a gap in its associate network.
• Qatar’s current account surplus rose to 18% of GDP in Q2; Oman’s narrowed to 2.6% in 2023.
• S&P upgraded Oman to BBB-, its first investment grade rating since 2019 [see (2) below].
• Oman Future Fund unveiled its first round of investments, totaling $0.6bn, including in a solar plant.
• Bahrain’s FX reserves rebounded in August to the highest in a year and its current surplus widened in Q2 to 5.7% of GDP.
• Iran launched 180 missiles at Israeli airbases and Mossad; the amount of damage is disputed.
• This came after Israel killed Hezbollah’s leader and invaded southern Lebanon, with 1.2m displaced.
• Airstrikes on Gaza and Yemen continued and the first in the West Bank for over 20 years killed 18.
• GCC foreign ministers, meeting in Qatar, called for ceasefires and met with Iranian officials.

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Here are two brief samples from the report:

(1) Oil spikes following Iranian attack on Israel

• As of this morning, Brent crude was trading at $78, up about 9% since Monday. It initially rose to $75 after the Iranian missile strikes on Tuesday and then further after Biden said on Thursday that Iranian oil facilities might be targeted by Israel. Iran produces over 3% of global crude.
• On Monday, I argued in a note to clients that markets had been underestimating the risks of Iranian retaliation. Oil hardly moved that day, as markets reopened following the confirmation on Saturday that Hezbollah leader Hassan Nasrallah had been killed and then reports that the ground invasion of Lebanon had begun. The overconfidence was clear in an op-ed ON Monday by John Sawyer, a former head of the UK’s M16: “Iran seems cowed, lacking the will and military capacity to respond… Israel has smelled the weakness” (FT).
• Iran had held off from responding to the assassination of Hamas’s leader, Ismail Haniyeh, in Tehran in July on US/EU urgings to give space for a Gaza ceasefire. However, it had become clear there was no ceasefire coming and then the attacks in Lebanon crossed more red lines and so I argued that Iran would feel the need to respond. It is unclear whether Israel expected no Iranian response to its actions in Lebanon, whether it calculated the risks were small or if it was actively seeking an excuse to make further strikes on Iran.
• Iran’s missiles appeared to have caused considerable damage to a hanger at Nevatim Airbase in southern Israel, but the IDF says none of the F-35 jets there were damaged. The fact that no Israelis were killed in the strikes (two were lightly injured by debris from missile interceptions) might mitigate the case for an Israeli counterstrike, but the widespread expectation is that one will happen. The main question is whether it will be tokenistic, as in April when Israeli just hit an air defense system, or cause significant casualties and damage, possibly to oil or nuclear sites, and lead to a more protracted conflict between the two countries.
• Israeli operations in Lebanon have intensified in the last few days. It has issued evacuation orders to beyond the Awali River, 60km north of the border. As of Wednesday, around 5,000 airstrikes had been made in two weeks, killing over 1,300 people (ToI, FT). The US is no longer seeking a ceasefire, something Lebanon’s foreign minister said that Nasrallah had agreed to just before he was killed (CNN).
• Meanwhile, airstrikes continued in Gaza and Israel also conducted the first on the West Bank in decades, killing 18 in a café in Tulkarm (Rt, Jaz). In Tel Aviv, Hamas members from the West Bank killed 7 people in a shooting at a rail station, the worst such incident in years (JP). Israel also bombed Yemen for a second time on Sunday, in response to Houthi missiles, attacking Hodeidah port, power plant and oil storage tanks (CNN).
• GCC foreign ministers, meeting in Doha on the sideline of the Asia Cooperation Dialogue, reiterated calls for ceasefires in Lebanon and Gaza. They also met with their Iranian counterpart and stressed neutrality in the conflict (NB, SG, Rt).

(2) Oman returns to an investment-grade rating

• S&P upgraded Oman to BBB-, returning it to investment grade (a minimum required by some investors), for the first time since 2019.
• The rationale is the return to fiscal balance since 2022 and the?deleveraging of both the sovereign and GREs. S&P has widened its surplus forecasts to 1.9% of GDP in 2024-27 and sees debt declining to 29% of GDP.
• The weak spot remains the real economy, with growth forecast at just 1.4% this year, partly due to OPEC+ cuts, rising to a still weak average of 2.1% in 2025-27, which implies weak non-oil growth, given that oil cuts should be tapered over that period. S&P says that a further upgrade would require more non-oil growth and rising GDP per capita.
• The dramatic fiscal turnaround, after 13 years of deficits in 2009-21, had its seeds in 2020 with the succession of Sultan Haitham who committed to fiscal discipline from the start of his reign (and our outlook turned immediately positive in Jan-20, after previously been skeptical of Oman’s reform plans).
• Although the Covid crisis and associated oil crash delayed progress and led to another round of downgrades, to a record low of B+ from S&P, there were signs of progress by late 2020 with the release of the first Tawazun fiscal balance plan, a VAT law and other measures.
• The boat was almost righted by 2022, when the authorities were careful not to binge on spending when oil prices spiked after the invasion of Ukraine, but instead pressed on steadily with reforms and directed much of the windfall towards reducing debt levels.

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