KUWAIT: Gulf countries are bracing for tough times as vital oil
revenues fall and after they missed a golden opportunity to diversify
their economies in a decade of unprecedented windfalls, analysts say.
The six nations of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab Emirates – could soon
start reeling from falling oil prices, which have dropped by half from
their 2014 highs to around $60 a barrel.
Pumping about 17.5 million barrels per day, GCC countries are
forecast to lose at least half their oil revenues, or around $350
billion a year, at current price levels. Oil revenues make up around 90
percent of income for most GCC states and with prices now below budget
forecasts, their governments are looking at certain deficits next year.
Spending cuts are sure to follow – and possibly even the region’s first
taxes – raising fears of public discontent and eventually an economic
slowdown.
The oil price drop has also sent Gulf stock prices plummeting, wiping
out billions of dollars of market value across the region and hurting
major private firms like developer Emaar Properties and builder Arabtec
Holding. The heart of the problem, leading Kuwaiti economist Jassem
Al-Saadoun said, is that Gulf states failed to seize on surging energy
revenues to build up their economies outside the oil sector.
“Gulf states have missed an important opportunity to reform and build
a real diversified economy,” Saadoun said. “Public spending has soared
to new record highs and it was not for vital infrastructure projects to
diversify the economy. It was mostly for wages, salaries and subsidies…
and handouts for buying political loyalty especially after the Arab
Spring.”
Economists are warning that even with the huge reserves many have
built up, a prolonged drop in oil prices will hit Gulf states hard. “The
prevailing growth model for most oil-exporting countries has left them
vulnerable to a sustained decline in oil prices,” the International
Monetary Fund said in a research bulletin last week headlined: “It is
high time to diversify”. Ratings agency Standard & Poor’s is warning
that an extended decline in oil prices will likely slow the Gulf
economies, reducing spending on their massive infrastructure projects
and hitting the private sector.
S&P has lowered its outlooks for Saudi Arabia, Oman and Bahrain,
though it has maintained their ratings because of their impressive
reserves. The IMF has said that – barring Oman and Bahrain, which are
already in deficit – GCC states will not be greatly affected in the
short-term as they can tap into reserves estimated at $2.5 trillion. But
these funds, the IMF warned, will “only provide a temporary cushion”.
In some parts of the region, the belt-tightening has already begun.
Regional powerhouse Saudi Arabia has insisted it will maintain its high
spending levels by tapping into reserves. But Kuwait has ordered major
spending cuts and is considering lifting petrol and electricity
subsidies. In the UAE, Dubai has announced plans to raise electricity
and water charges. Similar measures are expected by other countries.
Moody’s Ratings said Gulf countries are likely to start with cuts in
spending on “non-strategic investment projects” but will eventually face
tough choices. “Slowing or even reversing the growth in current
government spending, including subsidy reforms, will be more difficult
as governments seek to meet social welfare demands,” the agency said. As
oil revenues in Gulf states surged from about $100 billion in 2000 to
$729 billion last year, public spending grew from about $150 billion to
$547 billion, according to IMF figures.
But the spending focused mostly on items like wages and subsidies –
not crucial capital investment. “Current expenditure has surpassed
capital spending by miles,” said M R Raghu, head of research at Kuwait
Financial Center (Markaz). Cutting that spending now is difficult as it
means taking courageous decisions on wage and subsidy reforms, experts
say. The Gulf states have adopted a generous cradle-to-grave welfare
system with highly subsidised services and fuel and no taxation.
The World Bank has urged GCC states to start immediate cuts to energy
subsidies, which cost them more than $160 billion annually, and Saadoun
said it was “inevitable” they would have to start introducing taxes.
Such moves would prove deeply unpopular. But Saadoun said putting them
off would eventually make more drastic efforts necessary, which could
spark the kind of social unrest that has hit other countries in the
region. “Yes, these measures are politically sensitive, but the
alternative is an Arab Spring in the Gulf. Options are no longer easy.” –
AFP
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