Gulf nations led by Saudi Arabia have been putting on a brave face and touting the strength of their economies, claiming they can withstand any scale of shocks during the oil crisis. Unfortunately, a growing body of evidence suggests pretty much the opposite: the Gulf economies are in dire straits thanks to their overreliance on oil. With oil prices stuck at $40/barrel, S&P Global Ratings has estimated that GCC (Gulf Cooperation Council) central government deficits will reach about $490 billion cumulatively between 2020 and 2023 while government debt will surge by a record-high $100 billion in the current year.
Whereas Saudi Arabia, the region's largest economy, has some of the lowest production costs anywhere in the world, the harsh reality is that $40 oil is far from what the kingdom needs to balance its books. Indeed, the IMF has estimated that Saudi Arabia needs oil prices at $76.10 to achieve fiscal breakeven in the current year with the current oil price leaving the country with a huge budget deficit of 11.4% of GDP. Oil accounts for roughly 87% of Saudi budget revenues, 90% of export earnings, and 42% of GDP.
For perspective, the United States had a fiscal deficit of 4.2% of GDP in 2019 but will see the figure reach 13.1% in FY 2020 due to the adverse effects of Covid-19. The Congressional Budget Office (CBO), however, estimates the U.S. budget deficit in FY 2021 will return to normal levels, clocking in at 4.1% of GDP and grow steadily to reach 8.7% of GDP by 2049.
Interestingly, Saudi Arabia has denied being in austerity mode and says it will stick to its earlier budget announced in December. The country has, nonetheless, tripled its value-added tax, announced spending cuts in non-priority areas and suspended the cost of living allowance.
Other GCC countries are not much better off.
In the current financial year, the UAE has a fiscal breakeven oil price of $69.10/barrel; Kuwait's is $61.10 while Bahrain and Oman need oil prices of $95.60 and $86.80, respectively, to balance their books.
Only Qatar, with a fiscal breakeven oil price of $39.90, will be able to book a budget surplus.
The situation is not expected to improve any time soon.
Although Goldman Sachs ranks among the more bullish oil prognosticators out there with predictions of oil prices reaching $65 per barrel by Q3 2021, other analysts are far less sanguine. For instance, a recent Reuters survey forecast a modest uptick with Brent averaging $50.45 per barrel in 2011
That would still be far from covering most Gulf countries' deficits, with Saudi Arabia needing oil prices at $66/barrel next year to balance its books.
Tighter fiscal measures by GCC have begun to weigh heavily on economic activity, with business conditions deteriorating particularly in Saudi Arabia and the UAE.
Depressed economic activity is also taking a heavy toll on the region's banks, forcing a wave of mergers as they scramble to survive.
The National Commercial Bank, Saudi Arabia's largest lender by assets, has lined up a $15.6 billion takeover bid for rival Samba Financial Group. The $15.6B tab represents a nearly 30% premium to Samba's valuation before the deal was announced, while the potential deal will create a $210 billion (assets) behemoth.
The Saudi Arabian Monetary Authority, the kingdom's central bank, has unveiled nearly $27 billion in stimulus packages to support its flagging banking system suffering from years of weak private sector loan growth.
In January, Dubai Islamic Bank, United Arab Emirates' biggest Islamic lender, completed a deal to buy smaller rival Noor Bank in an all-share deal. The combined entity now holds more than $75B in assets. The giant bank has since then stolen its competitors' playbook by courting more international investors and raising its foreign ownership cap to 40%.
Related: The Secret To Survival For Canada’s Oil Sands Although the UAE has one of the most diversified economies in the region, it remains extremely reliant on oil, with the exception of Dubai. The UAE is the world's 8th largest oil producer, pumping 3.1 million b/d with oil exports accounting for about 30% of GDP.
In June, Qatar's Masraf Al Rayan QSC and Al Khalij Commercial Bank PQSC kicked off initial negotiations to merge their operations. The potential merger could create a combined entity with more than $45 billion in assets as well as one of the largest Shari'a (Islamic) compliant banks in the region. The deal follows the 2018 tie-up between the country's Barwa Bank and International Bank of Qatar that saw the proposed three-way merger with Masraf Al Rayan abandoned.
Qatar is the world's 17th largest producer of oil, pumping 1.5 million barrels of the commodity per day. The country's economy is heavily reliant on oil, with petroleum and natural gas accounting for more than 60% of GDP, 85% of export earnings, and roughly 70% of total government revenue.
Meanwhile, the Oman Arab Bank has finalized plans to acquire local competitor Alizz Islamic after Omnivest, one of Oman's largest investment funds, sold its 12% stake. The combined entity will become a wholly-owned unit of Oman Arab Bank with assets of $8.4B.
Oman pumps a million barrels of crude per day, making it the world's 19th largest producer just ahead of Libya. Like most Middle East countries, Oman is heavily dependent on oil and gas resources for 68% of GDP and 85% of government revenue. The country is expected to record one of the biggest budget deficits in the current financial year at nearly 20% of GDP.
The only recourse that GCC countries have to cover their huge budget deficits is by paying a visit to the debt markets.
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Luckily, most still enjoy plenty of goodwill and are having little trouble getting huge loans.
GCC countries have been pretty successful locking-in long-term, low-rate debt in the recent past, having already raised nearly $50 billion in the international debt markets in the current year.
Dubai visited the public debt market this month for the first time in six years, managing to raise $2 billion in a tightly priced deal, a good sign that the markets remain open for the region despite the downturn.
By Alex Kimani for Oilprice.com
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The crude oil supply & inventory drop will continue ahead & will ensure the sustainabiy higher prices ahead for lobg time.
Still, their budget deficits with the exception of Qatar will reach an estimated $490 bn cumulatively between 2020 and 2023 while government debt will surge by a record-high $100 billion in the current year.
And despite their excellent efforts in the diversification of their economies, Arab Gulf producers are still overwhelmingly dependent on the oil export revenues. While the non-oil sector in these countries has been growing, it will continue to be dependent on government contracts and these in turn depend on the oil revenue.
With oil prices far below their budget breakeven prices, they have had to issue debt bonds. But luckily these countries with the exception of Oman and Bahrain have very sizeable financial cushions to enable them to weather the storm until oil prices start to surge and surge they will. Both Bahrain and Oman need oil prices of $95.60 and $86.80, respectively, to balance their budgets.
Qatar was the least affected by the collapse of both global demand and oil prices as a result of the COVID-19 pandemic because it is far less dependent on the oil export revenue than other Gulf producers. Its source of revenue overwhelmingly comes from its LNG exports. Qatar’s budget breakeven oil price is only $39.90 meaning that it will be able to book a budget surplus even in the current price environment.
While the US oil and gas industry contributes 8% to the United States’ GDP compared with 30% for Russia and 42% for Saudi Arabia, oil through the petrodollar singlehandedly underpins the United States’ financial system and economy.
And contrary to claims otherwise, the role oil plays in the US economy is far more dominant than in the economies of Russia and Saudi Arabia for instance.
Today, oil through the petrodollar is the core of the US financial system. Undermine the petrodollar and you undermine the whole US financial system and the US economy.
The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London