A bleak perspective for the Gulf region: Sometimes, even the rich weep
- Written by Victor Lupu
Who would have predicted two years ago that the rich countries in the Gulf region could face worrying prospects? The drop in oil prices on international markets in 2014 and their constant low level of USD 45-50 per barrel have changed everything, both for oil importing countries as well as for major exporters. The first enjoy cheap fuel that contributes to their economic development, the latter are beginning to regard with concern the low price stability, which may undermine their economies soon.
It seems that, sometimes, even the rich weep. It’s not yet the case to get impressed by statistics, but even the rich states in the Middle East can’t survive a low oil price indefinitely, this is the conclusion that can be drawn after the International Monetary Fund (IMF) report released in October on oil exporting countries.
The IMF outlook shows a bleak perspective for Saudi Arabia, a country whose budget is built 90% on revenues from oil exports. The report shows that Riyadh will exhaust financial reserves in less than five years, under current conditions of price for oil barrel of USD 50 (Brent Oil) and USD 46 (WTI). Let’s not forget that a little more than a year ago the price exceeded USD 100 on world markets.
Thus, according to the IMF, this year the oil exporting countries in the Middle East will lose USD 360 billion due to the low price of oil. “Oil exporters will need to adjust their spending and revenue policies to ensure fiscal sustainability,” the IMF wrote.
Thus, in order to balance the budget, Saudi Arabia would need an international oil price of about USD 106 per barrel, and the current price of USD 50 per barrel would make the kingdom survive only five years. Moreover, it is anticipated that this year, Saudi Arabia will register a budget deficit of 20%, which means no less than USD 100-USD 150 billion! Thus, Saudi Arabia is facing a huge budget deficit and a current account deficit, after several decades of major surpluses. Despite huge foreign reserves of over USD 700 billion and a ratio of public debt/GDP ratio of just 2%, the situation becomes more complicated if the oil price stays on long term to the levels mentioned above and if Saudi Arabia gets involved further, in one way or another, in the civil wars in the region, such as in Yemen and Syria. Foreign exchange reserves can fall rapidly.
Iran, in turn, would require an oil price of just USD 72, the IMF said. Moreover, Tehran views with hope the expected lifting of sanctions in order to return to the international market and, according to sources, would flood the market with oil, to regain its share on the European market in particular.
Instead, Iraq has a small range for manoeuvre and would balance the budget at USD 81 per barrel. As a large part of its territory is occupied by ISIS, unstoppable conflicts are likely to provide a bleak outlook for Baghdad. “Violence increasingly affects civilians, and has a particularly adverse effect on confidence and expectations, and consequently on economic activity,” the IMF warned.
Bahrain too would need a price of USD 107 per barrel to balance the budget, being in a similar situation with Saudi Arabia, would see its reserves gone in five years.
In a better situation are laced the United Arab Emirates, Kuwait and Qatar. The budgets of these three countries would balance at an oil price of USD 73, USD 49 and USD 56 respectively, which means that they may survive for decades in the current international context.
The IMF report shows that the Central Asian countries are credited with foreign exchange reserves that would last a period of 15 years.
The IMF representative for Middle East and Central Asia, Masood Ahmed, said when presenting the report that rich Gulf states need to make important changes to expenditures and revenues. “Not only this year, but for the years to come, these countries will need to make an adjustment to better balance their spending to the new reality of the oil prices,” said Masood Ahmed.
The average of budget deficits in 2015, anticipated by the IMF for Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates is of 13% of GDP. Their overall deficit over the next five years will exceed USD 1 trillion if the oil barrel price remains at around USD 50. One solution would be to bring the domestic prices for fuel to the international market, the IMF says, which would bring these states about USD 70 billion annually more to their budgets. A first step in this direction was made by the United Arab Emirates, which reduced fuel subsidies.
The IMF report also recommends the six states in the region to diversify their economies and create two million jobs over the next five years in order to keep unemployment at current limits and provide opportunities for the growing population.
But the Middle East is a region troubled by endless conflicts; the economies of the countries in the area are affected by domestic crises or by crises coming from neighbouring states. Syria, Libya and Yemen are the most devastated ones. Jordan and Lebanon are home to hundreds of thousands of refugees from Syria and other countries in the region and huge pressures are set on their economies. For example, as a result of instability arising after the Arab Spring, Libya and Yemen have lost about a quarter of GDP, while Syria’s GDP has halved since the outbreak of the civil war in 2011. According to analysts, even if the war in Syria would end now, and the country would register an economic growth of 3% per year, it would take 20 years (a generation) to reach the pre-war level of revenues.
From the IMF’s perspective, the average oil price will be of USD 51.6 per barrel in 2015 and of USD 50.4 in 2016. Masood Ahmed, the IMF representative, argued at the launch of the report that “most people today believe that oil prices may come up a little bit from where they are today... By 2020, we are expecting to see lower oil prices at the level of ‘60s rather than the numbers they were used to.”
But not everyone shares this view. From the International Energy Agency (IEA) views are rather different. Executive Director Fatih Birol said recently that states should not bet that oil prices will remain low when designing their energy policies, since the oil supply could fall by the middle of 2016, due to lower investment and lower US shale oil output. “It will be a great mistake to index our attention to oil security to the oil price trajectory in the short term,” he said. In his opinion, the US production would decline by about 400 thousand barrels per day in 2016, which would compensate even for the expected market entry by Iran with 400-600 thousand barrels per day, following the lifting of economic sanctions. The same director says, however, that he does not expect a significant increase in oil prices on short term.
The response regarding the oil price developments remains in the air. It will be probably given by the average between optimists and pessimists. We do not know which ones are the most numerous.