Economic disruption in the Arab Gulf states
First published 2nd May 2020
by Tom Warneke
Middle East| Understanding Your World | Resolving Incidents & Crisis | Fostering Growth & Opportunity
Left unaddressed, the Arab states that make up the GCC (Gulf Cooperation Council) are looking at a dangerous economic situation as COVID-19 decimates the demand for oil sending the oil price into un-chartered territory.
The record low oil prices (in recent history, trending negative) are likely to enshrine budget deficits, reduced social spending and large amounts of borrowing before the end of 2020. This ultimately creates debt and complicates the investment market for a long time to come.
Diversification beyond Oil
However late to the party, the nations that make up the GCC have expansive diversification and social reform plans. If anything, the recent slump in energy pricing has made the need for diversification all the more dire.
We’ve seen over recent years the burgeoning entertainment and leisure sector that Saudi Arabia is developing, the goliath tourism hospitality sector in the United Arab Emirates and the increasingly progressive business and finance environments being built in Bahrain and Kuwait — all of these initiatives point to a region hellbent on diversifying away from resource based commodities.
The various state economies vary substantially in their levels of sovereign wealth and therefore their exposure to economic shock. While Oil outputs decrease to record lows, cash rich nations such as Kuwait, Saudi Arabia and the United Arab Emirates all hold significant cash buffers to protect against economic crisis. Bahrain and Oman conversely lack this level of savings and may require assistance from their neighbours to close the gap on any economic shortfalls.
Crisis beyond Oil
Of course, COVID-19 hasn’t just crippled the oil price globally, it’s crippled most of the economy. The very same factors that have lowered oil pricing have also affected most other markets.
People aren’t leaving the house. Social distancing and a near global closure of borders means oil prices are down but so are industries such as hospitality, travel and leisure. Those same industries that many gulf countries were banking on for diversification have also been hit.
Saudi Arabia is losing out particularly hard given the timing of COVID-19 overlapping with the holy month of Ramadan. Due to border closures and public safety precautions, the Hajj pilgrimage for most is considered cancelled as Mecca remains in a state of lockdown. Dubai similarly has faced the delay of their widely publicised Dubai EXPO 2020.
Stimulus and Spending
Most major economies around the world have instituted economic stimulus to prevent the collapse of their local economies, businesses and for economic relief for citizens. The GCC states are no exception.
Tax incentives and government fee deferrals are all being actioned as are payroll guarantees for businesses to prevent widespread unemployment.
Given the gulf’s penchant for strong economic support for citizens and massive existing social spending programs, it is likely that governments may accelerate their drive away from this often thought unsustainable practice.
Indeed, in the midst of an impending financial crisis, a need to implement taxes and fees may be seen in the future across the region. What this will do for a major expatriate population, often lured to the region due to its taxation free status, is yet to be seen.
Much like many institutional investors or personal investors, COVID-19 for those with available funds presents a potential gold mine in investment opportunity. Saudi Arabia for example has already begun investing in distressed assets and foreign debt and is adapting it’s wider investment plan to suit the developing environment.
Of course, beyond investment, the Arab Gulf. States must focus on economic and political security. Protecting their sovereign wealth as well as the livelihoods of their citizens, the security of the businesses and industry that operate across the region and the overall image of the nations will be key in ensuring long term prosperity.
Many of our clients globally are already engaging with us as they determine how to monitor the situation whilst continuing their operations and keep their teams and operations safe.
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