Gulf economies well positioned to cope with lower oil prices

The Gulf economies are in a position of strength to weather the recent plunge in oil prices. Many are better cushioned than at previous times in their economic history despite growing domestic populations. Oil prices are a principal revenue source for most Gulf economies and they serve as an essential litmus test for business confidence in the region. At $60 per barrel, the region is still macro-fiscally sound even if more than $250 billion in oil export losses will be incurred in 2015. Oil prices have been excessively exaggerated on their way down and they seem to be bottoming out.
Saudi Arabia’s well-being is felt not only in the Gulf but broadly throughout the region. Saudi Arabia’s balance sheet is the opposite to that of Greece. Debt to GDP ratio is 1.6 percent in 2014 and its foreign reserves are close to 100 percent of the estimated 2015 GDP of $732 billion. Undoubtedly, reserves will begin to be drawn down this year but there is plenty to carry Saudi Arabia for at least half a decade. If we add to the options mix the issuance of debt, Saudi Arabia has at least a decade of cushioning to get it through.
If oil prices average $60 this year for Brent many countries, Saudi Arabia included, would do well even if budget deficits could range from low single digits to high double digits depending on the amount of overspending. But even double digit deficits are manageable for Saudi Arabia for a few years. Equally, the UAE which derives half of its exports from non-oil goods and services is well-placed to withstand the fall in oil prices. UAE banks are well capitalized and lessons have been learned from the 2009 Dubai debt crisis which was well managed. Real estate prices have been rising in the UAE, especially Dubai, but are still within low, leverage-bound limits.
Qatar’s position of the world’s wealthiest country in per capita terms is one of its assets. Along with Kuwait, Qatar has the lowest breakeven budget in the Gulf for 2015. Qatar would be able to sustain high government spending, mainly related to preparations for the 2022 FIFA World Cup, which should help maintain the region’s highest growth figure through at least 2017.
In contrast to Saudi Arabia which sustained high overspending of 25 percent over the past decade, Kuwait tends to spend below its proposed budgetary allocation and is expected to sustain surpluses, albeit smaller ones, due to lower oil revenues. The recently-approved $116 billion five year plan is expected to increase output, lessen labour market imbalances and uplift private sector participation from 26 percent to 42 percent in the national economy.
As Oman’s economy is dependent on oil for half its output and more than 95 percent of its government revenues, a plunge in oil prices certainly exposes its finances to medium term challenges. Taxation has been a recurrent theme in Oman even if nothing has been done. Yet alternative sources of revenue from a sales tax to taxing remittances have been themes discussed over the last decade with inconclusive results.
Bahrain seems to be far more exposed to oil prices than the rest of the Gulf economies due to its high breakeven price of $120 per barrel. Bahrain’s more than 50 percent debt to GDP ratio and its low reserve asset base also make it more vulnerable than the rest. However, Bahrain’s wealthier neighbours and their implicit guarantee of its fiscal stability are reassuring. Moreover, Bahrain’s sound financial system and its deep domestic capital market help bring greater stability and liquidity.
The strengthening dollar and global deflationary environment have benefited the Gulf economies. A stronger dollar has supported sovereign and retail purchasing power even as oil revenues have dipped. Domestic consumers have benefited from moderate inflationary pressures as import prices have remained subdued. Despite the deteriorating geopolitics in the wider Middle East, the Gulf has been remarkably stable. Policy makers are far more nimble in managing geopolitical matters than outsiders give them credit for.
The era of abundance, double digit fiscal surpluses and never ending accumulating reserves seem to have come to an end. However, the Gulf economies are in a better position today to weather the fall in oil prices than before. We think that asset price bubbles could be a thing of the past. It is possible that many policy makers in the region will begin to rethink the economic model of the post-oil era. More importantly, low oil prices can be an opportunity for structural reform efforts, especially in lowering energy subsidies, enhancing the role of the private sector, productivity gains and, last but not least, boosting education.

— John Sfakianakis is Middle East director at Ashmore Group.