Oil Price: Gulf Economies in Dire Straits due to their Overreliance on Oil

2020-09-30 - 3:06 p

Bahrain Mirror: Gulf nations 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, according to Oil Price website.

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 balance.

Other GCC countries are not much better off, Oil Price website noted. 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.

Tighter fiscal measures by GCC have begun to weigh heavily on economic activity, with business conditions deteriorating with oil price drop and Coronavirus outbreak. Depressed economic activity is also taking a heavy toll on the region's banks, forcing a wave of mergers as they scramble to survive.

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. 

The only recourse that GCC countries have to cover their huge budget deficits is by paying a visit to the debt markets. 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.

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