The oil-dependent member states of the Gulf Cooperation Council (GCC) are currently facing numerous challenges in the aftermath of two simultaneous global crises that have hit the global regional economies: the spread of the Covid-19 epidemic and the plunging of oil prices to a record low.
The two crises and the measures taken to control the novel corona virus epidemic have slowed down the economy in GCC states which are heavily dependent on exports of oil and imports of almost all goods from technical products to food. Border closures and travel bans have contributed to the reduction of productivity, rising of unemployment and shrinking of GDP. Due to their oil dependency government revenues have recently decreased by almost 500 million dollars per day with the oil prices remaining between $20 and $30 per barrel.
With the largest economy in GCC, Saudi Arabia started the oil war with Russia to protect its market share after the failure to reach an agreement between OPEC plus states on 6 March 2020, thus causing the fall in oil prices by 30-35%.
Most governments in the region are likely to spend their large financial reserves unless oil prices recover. They may also reduce investment expenditure in infrastructure and oil industry in order to control budget deficit or to gain some time with additional borrowings.
The fall in oil prices has different effects on the budgets of the six GCC states. Qatar, whose economy relies on the exports of liquid natural gas and thus suffered less direct impact from the fall in oil prices, has a budget surplus, while the two small oil producers Oman and Bahrain have higher debts and are thus more exposed to price fluctuations.
The United Arab Emirates (UAE), Kuwait and Qatar have better financial protection mechanisms in place than Saudi Arabia and can endure oil price falls over a longer period, although it is unlikely that they could overcome budget deficits in the long term.
Enormous borrowings by the Gulf states
In order to avoid painful measures that may cause political consequences, the Gulf states have resorted to borrowings. Thus, Saudi Arabia has taken more than $100 billion foreign borrowings since 2014, having taken advantage of low global interest rates.However, the costs of borrowing have increased while the demand for Gulf bonds has decreased after the oil prices plummeted. Major credit rating agencies have already marked the Gulf bonds as highly risky investments.
The costs of default insurance against Saudi Arabia have tripled at the beginning of May 2020, which is at the highest level since 2016.
Despite the sharp decline in oil production this year, the richer countries such as Kuwait, Saudi Arabia, Qatar and the UAE will have more reserves to deal with the financial collapse. On the other hand Oman and Bahrain do not have the same energy resources and financial reserves to overcome the crisis, especially with the international debt markets still being very careful in providing support to highly indebted economies.
The Covid-19 crisis has also hit the non-oil sectors that the Gulf states have relied upon with the aim to achieve their economic diversification. Most of their plans for economic diversification included the strengthening of the tourism sector. However, the anticipated loss of income from tourism this year due to the corona crisis calls for a change in their diversification plans.
Saudi Arabia has lost this year’s income from the pilgrimage (the Hajj) to holy cities of Mecca and Medina – this year it would amount to about 7 billion or 15 at an annual level. The UAE also had to postpone the popular and attractive event Dubai Expo 2020, which was to bring $23 billion, i.e. almost a quarter of Dubai’s GDP.
As the first Gulf state and even the first Arab state to host the international football championship event, Qatar places a great deal of hope in Mondial 2022, ignoring the World Health Organisation prediction that Covid-19 would likely remain among the world’s population for a long time and may never disappear. Qatar authorities still do not believe international health experts’ warnings about the possible new epidemic wave, which leaves the possibility for the corona virus to continue in 2022.
World football championship – Qatar’s hope for profits
Qatar has invested about $200 billion in hosting the FIFA World Cup, which is a huge amount of money for a small state. The project is very expensive in comparison with the one organised in South Africa in 2010, which was estimated at three billion dollars, and in Brazil in 2014, which cost about 15 billion. To compensate for the costs, Qatar expects billions worth of profit, as was the case in Russia which managed to gain 13.5 billion profits for hosting the world cup in 2019.In the short run the Gulf states will focus on political and economic survival, so the incentive packages will only represent a burden for the planned economic reforms. This will open the questions about the need for a comprehensive reform of the long-term economic restructuring, including the sensitive issues such as unemployment, pensions as well as immigration and visa policy.
The Gulf region gives home to about 35 million foreigners who represent the backbone of the economy. However, in order to safeguard jobs for their own citizens, the Gulf states are now returning those immigrants to their home countries.
In Saudi Arabia there are more than 11.1 million migrant workers, mostly from Asian countries, with a 76.7% share of foreign labour force as compared to 90% in the UAE, 69.3% in Kuwait, about 80.9% in Oman, 94.4% in Qatar and 73.5% in Bahrain.
The International Monetary Fund (IMF) expects the oil exporting countries in the Middle East to reach a 4.7% economic growth in 2021, a forecast based on an optimistic scenario of the corona virus crisis, global economic recovery and stability of oil prices.
The decline in oil demand, and the downturn in tourism and aviation sectors in the coming years will have a strong impact on the Gulf states which will probably be among the last economies to fully recover from the crisis.
The previous fall in oil prices in 2014 encouraged the region which is dependent on energy exports to reduce government support to citizens, impose taxes for the diversification of income sources, shrink social transfers and downsize the public sector. Now the six governments in the Gulf Cooperation Council will find it difficult to manage their budget deficits without reforming their economies and international borrowings. This will affect the political stability that was »bought« with social relief during other social crises such as the Arab Spring when the Gulf monarchies doubled various social benefits for their citizens. During the present crisis those benefits are being abolished while new taxes are now imposed In Saudi Arabia VAT was increased at the beginning of May from the current 5% to 15%.
Is the Kingdom of Saudi Arabia a ticking time bomb?
As the largest and the most populous GCC country (with 34 million inhabitants, of which 65% are under 30 years old) with the biggest economy among the Gulf states, the Kingdom of Saudi Arabia represents a ticking time bomb in this region of strategic importance for global oil supply.Saudi Arabia started with oil production in 1938 and has despite Russian and American competitors remained one of the largest oil exporters in the world. The first modernisation wave started in 1973 when the oil price rocketed after the Arab oil embargo imposed during the fourth Arab-Israeli war. The large financial potential enabled a fast but superficial modernisation that led to many difficulties. In 1979 the extremist Wahhabi rebels seized the Grand Mosque in Mecca and demanded the return to the original Islam society (such as mud cabins instead of skyscrapers).
Twenty days after that incident which seriously endangered the Al-Saud dynasty, the Soviet Union invaded Afghanistan. The Saudi authorities took advantage of the Soviet invasion of Afghanistan and sent its radical elements there to defend Islam. This was a win-win situation: Saudi Arabia got rid of the radicals who were in turn glad to be on a mission to defend Islam from communism. American interests in preventing the Soviets from accessing the warm waters of the Gulf fully coincided with the interest of Saudi authorities. Thus, Saudi Arabia in a way exported its internal crisis to Afghanistan.
The sudden drop in oil prices in 1990s nearly led the country to collapse. According to German expert on Saudi Arabia Guido Steinberg that decisive period showed the importance of oil for the formation of Saudi politics. Suddenly, Saudi citizens could no longer provide for their families, which was according to Steinberg one of the reasons for forming Al-Qaeda.
During the current decade Saudi Arabia diverted the attention of domestic public to the war in Yemen in 2015 and to the sanctions against Qatar in 2017. This period was marked with the rise of Crown Prince MBS which was followed with purges in the dynasty and among the intellectuals, the rich etc.
What will happen in the future? Will a part of almost 20 million foreign workers in GCC who will lose their jobs, especially the 6,2 million Egyptians working in the Gulf states, head for Europe? Will Europe see a rising number of Saudi dissidents and economic migrants? At the moment there are several hundreds of female activists and liberal individuals with the emigrant status in Germany, the Netherlands, Canada and even in Australia. Will Saudi Arabia this time export its internal and economic problems to Europe?
Analysts believe that due to the crisis in GCC Europe can eventually become the new destination for workers for the Gulf region and for Saudi citizens, unless those countries adequately respond to numerous challenges that they are facing. Without sweeping reforms that would decrease their oil dependency, the Gulf states may head to an even worse crisis which can shake their dynasties.
GCC:
The Gulf Cooperation Council (GCC) is a regional intergovernmental political and economic union consisting of six Arab states of the Persian Gulf: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. GCC was established on 25 May 1981. All current member states are monarchies, including three constitutional monarchies (Qatar, Kuwait and Bahrain), two absolute monarchies (Saudi Arabia and Oman), and one federal monarchy (the United Arab Emirates, which is composed of seven member states, each of which is an absolute monarchy with its own emir). The region covers 2,673,108 km2 and has 65.3 million inhabitants, of which 35 million or over one half of the population are foreigners. GCC states produce 20 million barrels of oil per day, which covers 20% of global oil consumption.
In 2016, oil stocks in GCC states were estimated at 496.5 billion barrels, representing 39% of all world’s reserves and 70% of all reserves in the Arab countries. Saudi Arabia’s oil reserves are estimated at 266 billion barrels, which accounts for 15.7% of world’s reserves. With average daily oil production of 10 to 12 million barrels it ranks second in the world’s reserves. Oil represents 75% of all Saudi Arabia’s exports.
