With a dramatic fall in the price of oil and the global economy slowing down, Gulf countries find themselves in a crunch.
Plunging oil prices and the deepening fallout from the coronavirus pandemic is a double blow to Gulf governments as they seek to protect their energy-dependent economies.
In 2014, the last time the price of oil saw a drastic collapse, Gulf countries comprising Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the UAE slashed subsidies, introduced new taxes and undertook policies to diversify their oil-dependent economies.
With much of the global economy now in tatters and most economies pumping in money to stimulate economic activity, Gulf countries have little room to engage in painful reforms.
The largesse that Gulf citizens have become accustomed to may see a curtailment which could result in political instability for the absolute monarchies.
A Bloomberg financial analyst has warned that an economic recovery amongst the six Gulf countries could look “L shaped” for years to come amidst an oncoming global economic slowdown.
As the largest economy in the Gulf and the world's biggest producer of oil, Saudi Arabia, has seen its finances stretched in recent years as the country’s young and inexperienced Crown Prince Mohammed Bin Salaman (MBS) has taken over the reins of power.
The Saudi war on Yemen, launched in 2015, has seen the country bogged down in an unwinnable war even as the humanitarian crisis in the country goes from bad to worse.
A recent unilateral ceasefire by the Saudi government in its war against the Houthis, brought on by the coronavirus pandemic, may ultimately incentivise Riyadh to enter into negotiations and end its costly war.
The Saudi economy in recent years has also been battered by a cold conflict with Iran, which briefly turned hot when 50 percent of the country’s oil supply was knocked out by drone strikes with some pointing the finger at Iran.
A blockade against Qatar, the murder of Washington Post journalist Jamal Kashoggi, internal crackdowns on the Saudi elite and civil society has frightened foreign investors and tarnished the country’s image.
The UN’s World Investment Report for 2019 noted that while Foreign Direct Investment to Saudi Arabia rose from $1.4 billion in 2017 to $3.2 billion in 2018, it is still significantly lower than the 2008 peak of $39 billion.
“Political factors and lower oil prices were largely responsible for lower than usual FDI flows to Saudi Arabia,” the report said.
In 2019, the MBS government announced the largest budget in Saudi history at $295 billion in a bid to push through reforms and investment programmes. That was largely based on assumptions about the price of oil that no longer hold.
MBS’s ‘Vision 2030’ plan which aimed to modernise the country's economy has also been derided as a “white elephant” and now as the world and Saudi Arabia grapple with the coronavirus, it looks set to be a mirage.
A recent announcement to triple the value-added tax (VAT) from five to 15 percent are initial instalments in what may eventually amount to painful austerity measures for the country.
Initially introduced two years ago in a bid to reduce reliance on oil revenues, the VAT may now also hurt consumer spending.
The country's tourism and religious pilgrimage industry will also likely suffer this year.
Hajj and Umrah, religious rituals undertaken by Muslims bring in more than $12 billion to the kingdom every year contributing 20 percent to the non-oil GDP of the country, and around 7 percent of the total GDP.
An International Monetary Fund (IMF) report in 2019 painted a stark picture of the financial deterioration facing the Kingdom. It said that the net financial assets of the Kingdom had declined to just 0.1 percent of gross domestic product from 50 percent over the previous four years through 2018.
The Kingdom, it noted, will likely be a net debtor for the foreseeable future, even if oil prices rise to over $80 per barrel.
Over the same four years the net financial assets held by the six Gulf monarchies saw a fall of $500 billion according to a study by the IMF earlier this year.
United Arab Emirates
Although the UAE is the most diversified economy in the Gulf with the non-oil sector accounting for more than 71 percent of GDP, it is still heavily exposed to fluctuations in the oil market.
Dubai is particularly vulnerable and faces a repeat of the 2009 crash which saw the neighbouring Emirate of Abu Dhabi step in to bail it out, a UK based consultancy firm Capital Economics wrote in a report last month.
“Efforts to contain the coronavirus will cause Dubai’s economy to contract sharply,” said the authors of the report adding that “debts have risen to more than 80% of the Emirate’s GDP”.
“We think that Abu Dhabi would, ultimately, step in with another bailout. But a risk of a repeat of the events of 2009, when support was slow to arrive, is high. That would make the financial market and economic fallout much worse,” they concluded.
Dubai faces a triple threat of a decline in tourism, a continued lockdown aimed at tackling the spread of the virus, low oil prices, an oversupply in the country's real estate market and the risk of foreign residents abandoning the city.
The UAE’s flagship airline, Emirates, has said that the international airline industry is unlikely to recover for the next 18 months with the airliner likely to need extended state support.
According to the rating agency Moody’s in the UAE, “the negative growth and fiscal implications are most acute in Dubai, while it faces the greater risk of its government-related entities requiring financial support as a result of the deterioration in economic conditions”.
Unlike Japan, which saw the summer Olympics cancelled, Qatar, which is hosting the 2022 World Cup, may still have the chance to conduct the games as normal, depending on how the pandemic evolves.
More immediately the country has seen an explosion of coronavirus cases with more than 1,000 reported infections per day for the last five days.
Authorities there have attributed the spike in case to greater testing capabilities.
With malls closed and much of life coming to a standstill, the state-owned national airline Qatar Airways has announced significant staff layoff as air travel comes to a standstill.
In an early belt-tightening measure, the Qatari government in April postponed more than $8 billion in unawared contracts.
The gas and oil-rich country have seen demand in Liquified Natural Gas from its main customers in Asia and Europe drop significantly as both regions grapple with the coronavirus outbreak.
Almost a month in and the Kuwaiti government has shown no sign that it will relax curfew measures that have seen people confined to their homes for more than 16 hours a day.
The government has announced a series of measures to ease the financial burden on the oil-rich country reeling from the collapse in the price of energy.
The sectors most impacted include aviation, hospitality and the real estate sector as people stay indoors unable to travel and put on hold spending.
However, in part, because the government has been running budget deficits for several years it only has around $45 billion in reserves. Declining reserves and a fall in revenues has placed the country on a negative financial outlook, the rating agency Fitch warned.
Ratings agencies have warned that the minnows of the Gulf economies, Bahrain and Oman, will need “support from the rest of the GCC” to help them withstand the impact of the coronavirus pandemic.
Budget deficits for this year are expected to be in the double digits for most of the Gulf countries at between 15-25 percent of GDP. Only Qatar is expected to post an 8 percent of GDP budget deficit.
Bahrain and Oman both announced 30 percent of GDP economic stimulus packages, and they will both face a recession in the non-oil economy.
Alongside the economic stimulus package, Bahrain has announced 30 percent spending cuts with Oman following suit with a 10 percent cut.
After the 2014 oil price crash, Gulf countries introduced indirect taxes for the first time marking a first time attempt at fiscal consolidation.
The current pandemic may well see financially strapped countries slashing generous welfare provisions and maybe even direct taxes, the cost of doing this may go beyond the economic balance sheet and may even have political implications.