On April 15th, Gulf International Forum (GIF) hosted an online panel titled “A Twofold Blow to the Gulf: OPEC+ Implosion & A Global Pandemic.” GIF was honored to have been joined by a group of experts that included moderator Dr. Dania Thafer, Dr. Jasim Husain, Dr. Jean-François Seznec, Rachel Ziemba, and Dr. Hani K. Findakly. Dr. Thafer, Executive Director of GIF, opened the panel by describing the broader economic frameworks of the Gulf Corporation Council countries now in interplay with the ramifications of the COVID-19 pandemic. As the world faces this crisis, the consequences of the pandemic are not equal across economies. The lessened demand for oil and gas as well as the ongoing price wars have been detrimental to this critical market, which is a prime source of revenue for the affected GCC states now experiencing levels well below their economic break-even points. The economic dependency on hydrocarbons and lack of robust horizontal diversification in these economies renders them extremely vulnerable to these fluctuations given the respective endemic economic structures. Unfortunately, the few industries present beyond the oil and gas are those most susceptible to the coronavirus downturn such as hospitality and retail. Moreover, the highly-elastic nature of the labor force in the GCC states will likely impact the demand for real estate, goods, and services as the downturn engenders departures. GCC states also lack mechanisms such as unemployment and automatic stabilizers to stimulate the economy, thus pivoting to rely more heavily on credit and liquidity measures, rather than fiscal support. There are three policy measures available to mitigate this twofold blow for the GCC states: 1) gaining access to the credit market, dependent on their capacity to borrow; 2) utilizing fiscal buffers such as sovereign wealth funds to hedge losses, and 3) the provision of liquidity from central banks. Given these current conditions, we face several key questions, including what are the main objectives of this price war? Will Saudi Arabia and Russia strike a deal, and will it be viable for restoring GCC economies? How does this negotiation affect US-GCC relations? How will GCC states raise enough capital to survive the current economic crisis, especially those facing significant deficits and challenges?
Structural Insufficiencies in the GCC Economies
Dr. Kindakly focused on Saudia Arabia as a case study for the countries in the region and began the panel with a look back to the last financial crisis of 2007-08. The latter revealed deficiencies of the Western financial and banking system and provoked changes that are likely permitting the system to better withstand the current crisis. Unfortunately, the GCC economies did not learn the same lesson beyond some moderate artificial reforms in terms of dealing with issues like diversification, lowering dependence on oil, and changes to the labor force of the region. The hyped-up listing of Aramco shares, the SABIC-Aramco merger, and de-listings in the London stock exchange are all examples of these superficial measures lacking redress of fundamental structural economic insufficiencies. The inability of these economies to function in a global competitive environment, and their lack of productivity and flexibility, render them cost ineffective and vulnerable to both internal and external shocks. Compounding the economic suffering and slowed growth, many of these states have answered fiscal insufficiencies by raising taxes and fees and reducing subsidies.
For example, the current Saudi budget deficit is estimated about $272 billion—not surprising given its average of a 15-20% underestimated budget and overestimation of revenues by the same factor per year over the last 15 years. Dr. Kindakly estimated another $100 billion will be added to the country’s budget deficit this year and projects that they will implement similar measures as in the past to fill this gap: 1) using foreign exchanges reserves to lower the deficit; 2) external borrowing; and 3) local borrowing through commercial banks rather than reducing spending. His preliminary estimates for 2020 that the GDP will drop by about 15% with much of that dependent on the unknown duration of the coronavirus crisis and its detrimental impact on economic growth. With the Gulf states unable to offer measures like the US crisis package due to their currency being directly linked to the US dollar and their inability to print money like the Federal Reserve, the choices facing these economies are to either delink from the US dollar or to accept far lower economic growth in the foreseeable future. Dr. Kindakly proposed that these states will likely be facing another prolonged period of diminished real per capita income as previously experienced in the 1980’s-2000’s. He concluded that Russia maximizing market shares in order to bring down competition from the US and to sell as much oil as possible appears to be the shared objective with Saudi Arabia in this price war.
Economic Diversity Driving Market Access of the Gulf’s Weakened Balance Sheets
Ziemba began her segment by highlighting common trends and divergences in the region as the world faces an interlinked health, economic, and financial crisis with the pandemic. For the Gulf, the compounded loss of oil and gas revenues as well as investment revenues has been weakening the balance sheets. Yet the more moderate response by these economies when compared to fiscal shocks of the past decade and a half more closely mirrors emerging markets as opposed to developed markets in their response to the crisis. By contrast, the policy response in the Gulf has been more credit-oriented with liquidity measures to keep the banks open and flowing, which Ziemba points out is not going to be sufficient. The global community is indeed facing the same issue of how to put economies on pause while effectively combatting the health crisis in a manner that will permit revival at the appropriate time. Across the board, the price and demand drops on oil have placed pressure on all countries who cannot help but run at deficit with oil at $30.
In terms of divergences, the amount of savings available varies dramatically across the region: countries like UAE, Qatar and Kuwait have much more in terms of financial resources than Oman and Bahrain for example. These countries economic equalities will be reinforced by the path to be selected among cutting spending and reinforcing the downturn; borrowing more debt (recent favorite of many countries); or drawing down existing assets. The diversity of the region’s sovereign funds (development funds, investment funds, segments of funds, and central bank assets) and how they are invested will also play a role. She expects to see the more development oriented sovereign investors with local investment mandates being expected to invest more at home and decisions on big projects may vary. Ziemba’s projects perhaps more co-investing and partnering globally as well as reserve funds being drawn down and depleted. This economic diversity will drive which countries have market access: for example, Qatar easily issued $10 million in bonds recently, perhaps as a show to demonstrate that they were able to and Ziemba expects others to conduct similar moves where possible and notes the importance of upcoming maturities. Oman and Bahrain will both need regional support but will need to pay a higher premium in cost if they would like to maintain market access. Ziemba closed her segment with the assertion that the greater government involvement in the financial crisis will likely render the situation even more difficult for the private sector.
Togetherness Above Regional Disagreements While COVID-19 Kills the Demand for Drude Oil
Dr. Seznec opened with Bloomberg’s assertion that the pandemic may reduce the global demand for crude oil by up to 35 million barrels per day, making it difficult for Russia and Saudi Arabia to create a plan to reach those levels of reduced production and change the prices. Moreover, storage facilities around the world are at capacity, and storage costs in tankers have gone from $40,000 to $200,000 a day. He noted that Russia and Saudi Arabia might only be willing to make the necessary cuts should the US do the same, but while the latter has not officially decided to make these reductions, adjustments have had to be made to avoid bankrupting companies. If the prices go below $20/barrel, many companies would disappear. An aggressive reduction on the part of the Saudis and Russians would be a cut of $5 million barrels per day each, but the Saudis are most concerned with holding the Russians to the whatever cut is agreed upon given the history of not abiding by terms in the past. At this point, Dr. Seznec is not optimistic that any cuts made will in fact make a big difference on prices due to the demand being so low and in the face of the coming deep recession. As such, the Gulf countries will need to aggressively reevaluate their plans.
Referring back to the case of Qatar, he noted that the investment authority is extremely opaque, but they would take an enormous hit of 30-40% loss if they had to sell today given their principal investments are in real estate, in owning companies and in owning market shares. They will have to cut projects—such as already announced with their LNG project—if borrowing money will not be enough. Likewise, they are having to cut many major projects for the 2020 World Cup. Dr. Seznec considers that Saudi Arabia has a slight advantage given that their assets are mainly held in cash and agreed with both Dr. Findakly’s estimates and the need for a change in approach. He expects that many of the Vision 2030 projects will cease and the country may pivot to development based on their capacity for exploring very advanced chemicals for value-added based on the advantage of low-cost carbon molecules. The UAE has two different cases between Dubai and Abu Dhabi, where the latter is highly liquid and has a lot to lose should they start selling the assets, but like Saudi is having to abandon many of their large projects just compete with Dubai. Dubai may profit from this situation with less competition from Abu Dhabi and may have some great advantages during this global economic crisis. In closing, while Qatar may suffer the greatest effects of the region, the global crisis outreaching any regional disagreements may in fact promote a togetherness with Saudi Arabia that would be beneficial.
Confidence and Liquidity are the Focus of Most Gulf Stimulus Packages
Dr. Husain opened his segment on various fiscal stimulus packages in the Gulf to note that the combined total in the GCC stands at $150 billion and the figure is on the rise. All the GCC countries have the goal of providing financial relief in common by offering soft loans, delaying installments of loan, etc. Dr, Husain, from Bahrain, elaborated how Bahrain stands out in this situation as the government has gone out of its way offering support with around $11 billion that continues to grow. The goal of fiscal balancing has been placed on hold and the idea of ensuring that the public is content and businesses are confident are surprisingly taking priority. The Bahraini nationals working in the private sector will have their salaries paid by the government for three months—April, May, and June. The government is likewise covering utility costs for the same three months up to 2019 household levels. Banks have also been instructed to defer all loan payments for six months without interest or fees in order to support an environment of liquidity and confidence in spending. Credit card companies are likewise delaying the receipt of minimum payment amounts for six months.
Saudi Arabia has had two tranches of stimulus thus far totaling $32 billion and the country’s banks are likewise delaying loans by six months. In Saudi, SMEs are being given the opportunity to delay providing their VAT to the government and delaying the fees for six months and there are no visa entry or departure fees for expatriates. The UAE has the largest package today of $70 billion with the focus on the financial services sector and injecting money back into the economy. The stock market is also a priority in the UAE, haven fallen by 36% in the Q1 of 2020, the highest drop within the Gulf. Oman, has also allocated $21 billion, primarily directed at providing support to the financial institutions but has the worst outlook within the GCC countries given its reduction in ranking and difficult situation even prior to the crisis. Dr. Husain asserts that they are thus providing the least with a minimal focus on individuals and companies—though a new package is expected soon—but they are not really in an economic position as discussed to provide much support. Finally, Kuwait is mainly focused on the banking industry and reducing reserves to increase the capacity of lending to households. Qatar has managed to raise $10 billion during these difficult times and a $23 billion package for delaying loans and helping the banking and stock market. Dr. Husain made the point that all of this support in the GCC is directed towards nationals while the expatriate community is suffering from loss of jobs and may even be unable to return to their countries. Given that the labor force and economy relies heavily on this segment of society, Dr. Husain asserted the need for more attention to relief for this group.