The Oil Crash May Be Over but the Gulf Countries are Still in Debt

In 2014, oil prices collapsed, thus leading the Gulf countries into a borrowing spree in order to carry on through the hard times. 

While the oil crash, maybe 5 years old and well in the past, debts continue to soar in the Gulf, thereby leaving these economies hanging by a thin line. Should the crisis come knocking, then it’ll be pure chaos.

Apart from borrowing to paddle through the tough times, the Gulf governments also made sure to reduce their spending not to mention exploring more avenues with the aim of expanding their economies.

In the meantime, political tension continues to take center stage in the Gulf with a Saudi-led section of Qatar splitting the Gulf Cooperation Council which is constituted by six states. In addition, there is also the factor of regional dynamics which means that the weak may not expect help from the strong.

Should the oil prices come plummeting to the ground again, then the effects could be more devastating than in 2014. This will then spark a chain reaction due to the fear of the region entering a recession since the government will be unwilling to spend and the international markets will also cut back on lending. 

Further evidence seems to point to the same outcome if the oil prices take hit. This includes high debts, low foreign exchange reserves and little to no chances of coming together to pool resources. 

A Time to Reckon
The oil crash in 2014 was an eye opener for the oil-producing giants in the Gulf, especially with this oil crash proving to be the worst in a while. This moment of reckoning also goes for leading global exporters of liquefied and crude natural gas.

After the crash, the governments realized they could no longer sustain state handouts as they used to when oil prices soared. Instead, the Gulf governments, now running low on cash, have been trying to pull off a tough balancing act. One of cutting down benefits to its citizens and on the other hand, trying to maintain the citizens’ belief.

Both the United Arab Emirates and Saudi Arabia have introduced value-added tax and excise duty for the first time. However, the efforts to reduce the wage bill is marred with political hazards which also stand to be the biggest item on the Gulf budgets.

Bahrain and Oman stand out from the rest with their economies presenting what could be an exception for the effects that lie in wait if the Gulf governments fail to diversify their economies. According to a report by Bloomberg, the GCC formed almost a quarter of the emerging market bonds sold both in euros and dollars.

This represented an increase from below 2 percent in the previous decade. Put together, the Gulf economies come close to tripling the debt to the gross domestic ratio from 2014. 

With such indicators, it will be difficult and dangerous for the market participants should the debt levels or high interest loans take a turn for the worst, especially paired with a nosedive in oil prices. 

Throw the succession politics in the mix and you have a dangerous cocktail of risks. With poor economy diversification, it will take time to realize profitable diversification.

Take, for example, Saudi Arabia’s Vision 2030. This diversification blueprint was launched in April 2016 and its sole purpose is to pull the Saudi’s economy from oil. According to the blueprint, Saudi aims to increase non-oil export shares to 50 percent up from 16 percent and to increase the private sector’s share in the GDP to 65 percent from the current 40 percent.

With such detailed plans, the economy is bound to broaden and this will create more jobs for the youth in the region while also securing the region’s future. 

The Vulnerable 
The grim picture doesn’t appear uniform throughout the bloc. Kuwait and Qatar enjoy protection from massive financial buffers. The U.A.E. is also firm but things are different in Bahrain and Oman. These two countries took the time to embrace fiscal reforms even with clear warnings from the reducing energy reserves. These reasons make it difficult to predict a certain future for the two countries.

According to Bloomberg Economics, Bahrain and Oman have already reached unsustainable debt levels, which is a different scenario compared to

Saudi Arabia. 
With the latter, it’s possible to hit the debt levels of 30 percent of its gross domestic product by 2020 should the massive budget deficits continue to bite and if it also doesn’t dip into its reserves, which is lower by a third from 2014.

Of all the sovereigns, Oman faces the biggest budget deficit as reported by Fitch Ratings. Reducing buffers in Oman have also attracted heated debates if the sovereign should also receive a bailout similar to what Bahrain received in the past year.

According to the chief economist at the Abu Dhabi Commercial Bank, the main issue lies in the success that comes with diversifying economies funded by debts. The economy continues to warn against an impending weakening of the economies due to high leverage. 

Bahrain, on the other hand, might be lower than Oman but its bonds appear to trade higher since the markets believe it enjoys strong political ties with Saudi Arabia. However, even with these alliances, Bahrain only received aid from the gulf only after the international investors started shutting their doors coupled with a mere reform promise. 

In contrast, Oman prefers to sit on the fence when it comes to its political stand. This, according to analysts, will propel it into turbulence if it doesn’t make painful but necessary changes.

The rising debt levels are a major concern and this might escalate should the purpose lack proper strategy and if the economy fails to accelerate.

According to economic analysts, the only way out of this uncertainty is if the Gulf countries move to diversify their income and growth and stop the over-reliance on a single source of income – oil.

To implement the measures already established, the GCC countries will have to keep these 3 principles in mind. First off is to elevate local enterprises to global standards through strategic management. 

Second is to use technology to accelerate early-stage economic development and the final principle is to build a sustainable future in the form of a labor force which is capable of learning new innovations.