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Challenging Scenarios for US-GCC Relations in the Wake of the Pandemic

The lasting consequences of the COVID-19 pandemic in the Gulf countries will be shaped by the capabilities of each government to implement efforts that respond to citizens’ economic needs while effectively mitigating the worst health outcomes. Transparency, honesty, and openness are key qualities for leadership messaging. Similarly, U.S. interests in the Gulf will depend on how regional elites and publics perceive U.S. policies.

Given that we are only six months into the COVID-19 pandemic, we can only draw tentative conclusions about the virus’ long-term impact as combatting the virus requires reliable data for projecting infection rates and deaths, and implementing effective mitigation measures. China waited between 4-6 weeks before notifying the world of a possible global health crisis while Beijing continues to underreport casualties and deaths according to some reports.  Similarly, Iran also hesitated to acknowledge the outbreak of the virus even as senior officials became infected. Delays from both China and Iran have skewed the projections for the GCC and the region’s management of the crisis. Although reliable data is now arriving out of South Korea, Taiwan, and Europe, local conditions remain a major factor in gauging the impact of the pandemic on each GCC country. Fortunately for the Gulf states, the World Health Organization’s monitoring and assessments on both a national and regional level offer valuable insight for the region to address ongoing and future health concerns.

There are conflicting analyses on the outcomes of COVID-19 for the GCC that raise important questions about the recovery strategies pursued by each member state. For the US, policies toward the GCC bloc must not only be sensitive to the context of each country, but also demonstrate a determination to strengthen bilateral relations and shared interests without engaging in a competition with China and Russia. China has already exploited the pandemic to send medical supplies and equipment and share expertise with Gulf countries which may in turn strengthen the appeal of its Belt and Road Initiative (BRI). Meanwhile, Russia is on standby to fill any security vacuum left by the US.

No Immunity for Gulf’s Major Economies

Looking at the GCC, there are two logical groupings, Group A: energy producers with access to financial liquidity – Saudi Arabia, UAE, Kuwait, and Qatar and Group B: energy producers with limited access to financial liquidity – Bahrain and Oman. In this analysis, access to financial liquidity includes funding from all domestic and international sources. Kuwait, for example, relies primarily on its own financial resources–private and public–to ramp up health services, protect companies, and maintain government operations. Given its stability and conservative fiscal policies, Kuwait also qualifies for external funding if needed. Oman, on the other hand, must rely on global institutions such as the International Monetary Fund (IMF) to overcome budget deficits and their potentially adverse effects on domestic stability and security.

For Group A, traditional sources of revenue derived from energy resources may prove insufficient this time around. The GCC as a whole experienced a severe price shock after oil prices collapsed as a result of the Saudi-Russian price war and the outbreak of COVID-19. The decline in oil prices threatens Saudi Arabia’s Vision 2030 reforms, which may now face setbacks because of lost revenues. The Kingdom will also be deprived from important tourism revenues after both this year’s Umrah and Hajj pilgrimages were suspended. A similar fate may await the UAE and Qatar, who have ambitious reform agendas of their own that depend on strong energy markets. Likewise, the UAE has already postponed this year’s World Expo while the annual Grand Prix in Doha was put on hold, highlighting a bleak period ahead for the region’s tourism, airline, and hospitality industries.

In the energy sector, the OPEC+ agreement between Saudi Arabia and Russia has only marginally stabilized oil prices.  Earlier estimates of a recovery by the fourth quarter (Q4) of 2020 have faded given the production glut and declining global demand, compounded by the coronavirus. The GCC countries have already seen a contraction in Q2; tens of thousands of foreign workers have lost their jobs. Currently, GCC countries estimate they will require upwards of an estimated $140 billion stimulus funding for local companies to maintain even a minimal level of domestic economic activity.

Any recovery process must address the length and depth of the economic contraction underway: the rising budget deficits, disruption to supply chains needed to feed consumers and enable industry, the distortion of trade relations as countries seek to protect their citizens’ access to needed goods and services, and declining energy exports. The GCC banking systems lack experience in providing support to companies through loan refinancing mechanisms, dealing with distressed assets, financing SMEs, but also supporting a private sector largely dependent–directly or indirectly–on government contracts.

However, on a more positive note, GCC’s dependence on foreign labor in most  sectors may force overdue changes to current restrictive labor policies including visa sponsor policies (kefala), the lack of unemployment insurance, pension benefits, and health care, that may require upgrading if Gulf economies hope to attract returning workers.

Bahrain and Oman Face Deeper Troubles

Yet, the GCC is not a monolith: Its Group B countries; Bahrain and Oman have much in common with countries in the wider MENA region such as Egypt. All face budget deficit challenges that make them each vulnerable to instability and dependent on external assistance to fight crises that inflict widespread economic damage. Bahrain will expect help to arrive from Saudi Arabia and the UAE as it has in the past, but will need to accommodate an oppressed Shia majority if it wants to avoid unrest. Oman, in contrast, has simply overspent in the past five years and will require extensive economic and political restructuring to appeal to international creditors and investors. This is a significant test for the new sultan Haitham bin Tariq, who is well-equipped to manage given his long government service and experience as chairman of Oman 2040, the country’s national development project.

U.S. Must be Flexible in Policy Toward Gulf

If the US wishes to protect its interests in the Gulf, it must adopt a multifaceted approach to the complex challenges surrounding economic recovery in both groups of the GCC countries. The US should subtly shelve talk of further disengagement from the region and abandon its arms-for-oil mentality.

The US should instead recognize the opportunities provided by the current crisis to extend meaningful support without overstretching its own overtaxed resources. Shared interests between the US and GCC have historically been built on three pillars: security, stability, and mutual benefits. These same interests redefined to address current and upcoming challenges can provide a framework for building stronger, more resilient, and relevant relations.

The first line of engagement should be an expanded program of professional and technical assistance. GCC governments are taking the COVID-19 pandemic seriously by mobilizing all available resources. The US should match these efforts and assign healthcare professionals to work with their GCC counterparts to help contain the spread of the virus. A perception among the public that sees the US shifting to provide humanitarian technical assistance and away from arms sales will go far in restoring the interpersonal engagement that has been at the heart of the US-Gulf security relationship.

Secondly, the US should take initiative in encouraging the IMF, World Bank, and other international financial institutions to provide assistance to GCC countries under transparent programs that enable the Gulf’s public and private financial sectors to adapt their banking resources to support a sustainable recovery. Incentivizing GCC states to emphasize the role of the private sector to achieve economic recovery is in America’s interest. Core US policies promoting transparency, strengthening institutions against money laundering and corruption, and preeminence of the dollar will benefit directly from the financial independence and integrity of the GCC and the region’s increasing private sector capacity.

While the regional outlook is gloomy, the weaknesses that appear clear today have been accumulating for years. Without comprehensive and economically inclusive strategies that address long-term future, the GCC will continue to have unbalanced and underperforming national development strategies. This challenge is as true for the oil producers with deep capital reserves as for the resource-challenged states who may experience political instability and popular unrest unleashed by the coronavirus pandemic.

 

Jean AbiNader has been working internationally, in some 40 countries in Europe, Asia, the Middle East, and Africa at the intersection of international marketing, organizational change, cross-cultural communications, and workforce development.

 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Jean AbiNader has been working internationally, in some 40 countries in Europe, Asia, the Middle East, and Africa at the intersection of international marketing, organizational change, cross-cultural communications, and workforce development.

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