Global oil prices have slumped by about 25% since June due to a glut in the market, weaker demand and a gloomy global growth outlook. Oil-dependent Gulf states will face budget shortfalls if the decline in oil prices persists, International Monetary Fund chief Christine Lagarde warned on Saturday. A sustained decline of $25 a barrel would reduce the revenues of most Gulf Co-operation Council (GCC) countries by 8% of gross domestic product, “and put many of them into a fiscal deficit situation”, she said.
After the 2011 Arab Spring unrest, countries ramped up spending to ensure that the governments’ welfare benefits reach poorer sections of the society. While Qatar has mega projects lined up in preparation for the FIFA World Cup 2022 in an estimated $200bn-plus spending drive, Dubai’s successful bid for the World Expo 2020 will boost project spending in the UAE. In Saudi Arabia, the biggest economy in the Gulf, projects worth $790bn are in progress or being planned.
According to estimates published by Meed at the beginning of the year, the total value of Gulf projects that were being planned, or already underway, was nearing $2.46tn compared with the combined GDP of the GCC last year at $1.64tn.
The current glut in oil markets is likely to persist next year due to demand slowdown, various forecasts suggest. The surplus scenario may even worsen as US lawmakers are on track to okay exports of the country’s booming crude production.
Gulf countries should brace for the impact. Oman may have to start selling foreign assets or borrow on international markets in the coming years if spending rises during a period of lower oil prices and economic growth. Former Kuwait central bank governor Sheikh Salem Abdulaziz al-Sabah warned in January that his country would be forced to take measures such as devaluing the dinar or dipping into its Future Generations Fund if spending continues unabated.
Qatar is facing slowing economic growth as gas exports level off. While Qatar does not face difficulty in funding its big-ticket infrastructure upgrades, scaling back some projects down the priority list could reduce waste and ensure that key projects are delivered on schedule.
The oil price slide need not be causing panic in the Gulf. Riding on the back of consistently higher oil prices for more than a decade, the GCC countries have built fiscal reserves estimated at $2.45tn by the International Institute of Finance.
The IMF has estimated Saudi Arabia will need an average oil price of $90.70 a barrel next year to balance its budget; the UAE $73.30, Kuwait $53.30 and Qatar would face $77.60. But Oman and Bahrain would need much higher budget break-even prices.
GCC states, understandably, wield limited monetary policy manoeuvrability with their currencies pegged to the US dollar. They should now take advantage of the huge fiscal buffers built over the years to finance longer-term initiatives to strengthen the private sector, reform the labour segment and broaden the equity markets. The policymakers need to factor in a non-oil scenario in their vision for the future. In any case, “one day, oil will run out”.
