The coronavirus – officially known as COVID-19 – crisis has escalated dramatically over the past few weeks, in a way that has shocked billions of people, and taken many politicians around the world by surprise.The economic repercussions of this crisis have plunged the global oil and stock markets to record lows, while the measures taken by governments and central banks to contain the situation were unprecedented.
In Gulf Cooperation Council states, a combination of demand-side pressures from COVID-19 and the subsequent collapse of the OPEC+ supply-cut agreement has led to a rapid deterioration of the GCC’s economic outlook.
The effect of low oil prices on the economy is already being felt across the region and prompted Gulf governments to move quickly to deal with the new situation. Indeed, the six members of the Gulf Cooperation Council unveiled a $120 billion, (Saudi Arabia: $32 billion, UAE: $34.3 billion, Oman: $20.8 billion, Qatar: $20.6 billion, Bahrain: $11.4 billion, and Kuwait: $1.5 billion), emergency support package to contain the economic downturn.
That said, the economic outlook for the Gulf states this year is still bleak. According to the International Monetary Fund (IMF), GCC countries are expected to post deficits in 2020 and possibly slide into recession. The GCC’s fiscal deficits are now projected to reach 10-12% of GDP in 2020, implying additional financing needs of around $150 billion to $170 billion.
Lower fiscal revenue suggests that GCC governments will contain or reduce spending, whilst widening fiscal deficits are most likely to push public debt up substantially across the Gulf region. Most countries in the region still have low public debt, but the pace of accumulation will almost certainly rise in the near-term.
Diversification, which is the banner of economic policy in the region, may receive a severe blow due to the current circumstances. Certainly, non-oil sector growth is now projected to fall significantly this year, and shrink in the case of Saudi Arabia for the first time in more than three decades, according to the Institute of International Finance (IIF).
The GCC reserves and sovereign wealth funds (SWF), while still large, are likely to decline, as these are used to finance both fiscal deficits and economic stimulus measures. For example, the decline in SWF assets could exceed $300 billion this year, according to the IIF.
And the collapse in oil prices is exposing a divide between Gulf States. The United Arab Emirates (UAE), Qatar and Kuwait are comparatively well-insulated against an oil price downturn, given their relatively small populations, their large financial buffers and low levels of public debt. As such, their fiscal adjustments are expected to be more moderate.
Saudi Arabia, while also benefiting from large financial buffers and low public debt, has a much higher fiscal break-even, and is therefore under more pressure to consolidate. Riyadh has already announced about $13.3 billion in budget spending reductions.
Bahrain and Oman, however, stand out as the GCC’s most fiscally vulnerable. Both countries have high debt-to-GDP ratios, fiscal break-even oil prices and small sovereign wealth funds compared to the rest of the bloc, indicating more pressure to consolidate.
Oman has already approved a 5% budget cut to different ministries to help contain the deficit and has instructed state-owned companies to reduce current spending by 10% and pause capital outlays. Worryingly, the Fitch rating agency noted in a recent report that Oman’s inability to issue debt beyond the next few months would seriously threaten the sustainability of its currency peg.
These economic difficulties of the Arab Gulf states come on top of other regional problems such as the war in Yemen, US-Iranian tensions, and worsening regional conflicts. This is in addition to, of course, the pressures caused by lockdowns and attempts to contain the spread of the virus.
These conditions are likely to have negative impacts among GCC countries. The existing tensions due to the crisis with Qatar could be exacerbated as a result of the Saudi-led price war, particularly if the economic downturn persists.
Social instability risks also are rising in Bahrain and Oman as economic conditions deteriorate. With governments set to tighten spending in response to the plunge of oil prices and the consequences of the spread of the coronavirus, this will weigh on both governments’ abilities to fill the gap with public sector employment. This implies a higher risk of renewed social discontent over the medium term, or after containing the coronavirus.
All these developments indicate that Gulf states may sooner or later face difficult or perhaps politically sensitive options, including rolling out more taxes, more austerity measures and further reduction in government spending, or continue to deplete their financial reserves.
Against this backdrop, Saudi Arabia could strike new agreements and eventually reverse its current course by paring back production and allowing oil prices to recover. Any related upswing in prices would, of course, have a major positive impact on public finance forecasts across the Gulf region. However, the current crisis once again demonstrated that dependence on oil is not a sustainable policy.