Oil-rich Gulf nations are relying on a well-worn playbook of spending less and borrowing more to get through the coronavirus crisis but with the outlook for oil clouded by uncertainty the strategy is riskier than before.
Previous bouts of belt-tightening have relied on rebounding oil prices to replenish state coffers but Gulf states have bigger funding needs and lower foreign assets than in previous crises, while the pandemic risks keeping energy demand subdued for longer.
Brent prices have rebounded since plunging to a more than 20-year low in April, but at just over $40 per barrel, they are significantly below what most Gulf states would need to balance their budgets.
In the meantime, the shift to austerity in a region where government spending is the main engine of economic growth, along with a move in some countries to protect citizens' jobs at the expense of foreign workers, is already hurting growth prospects.
“The problem faced by the GCC (Gulf Cooperation Council) is that domestic demand is driven by government spending and this would need significantly higher oil prices,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“Fiscal buffers have deteriorated over the past few years limiting the space to support growth and requiring fiscal reforms.”
The consolidation measures, which contrast with trillions of dollars in stimulus packages introduced by governments outside the region, reflect the Gulf’s limited room for maneuver.
Budget deficits there currently range from an expected 11.4 per cent of GDP for Saudi Arabia to 16.9 per cent for Oman, according to the International Monetary Fund, with only Qatar expected to stay in surplus.
Current policy responses are largely in line with how regional authorities reacted to previous crises. The Gulf saw debt levels spiking after the 2014-2015 oil price crash, and several countries enacted labor policies that favored locals over migrant workers after the 2011 Arab Spring.
This time, however, the risks are greater because the outlook for oil demand is more uncertain.
Goldman Sachs expects Brent prices to rally in 2021, reaching $65 per barrel by the third quarter next year. But a recent Reuters survey forecast a modest uptick in 2021, with Brent averaging $50.45 per barrel.
That would still be far from covering most Gulf countries' deficits. The International Monetary Fund in April estimated Saudi Arabia’s breakeven oil price at $76.1 per barrel this year and $66 next year.
“We expect the modernization of GCC economies and their diversification away from oil to take time,” said Moody’s, which estimates non-oil economic growth to remain weak in the coming two years when compared to historical averages.
A Saudi finance ministry spokesman said that the crisis will have a negative effect on non-oil economic growth this year, but less than what was estimated at the beginning of the downturn.
There are some differences of approach between the six GCC countries.
Saudi Arabia, the region’s largest economy, has said that it is not in austerity mode, and that it will likely stick to the budget announced in December.
It has nonetheless tripled a value-added tax, suspended a cost of living allowance, and announced spending cuts in non-priority areas.
“There is a strong view dictating fiscal policy in Saudi that oil prices should be recovering this year and next year to a point that it would justify maintaining spending unchanged,” said John Sfakianakis, a Gulf expert at the University of Cambridge.
“It’s a more aggressive approach than other Gulf countries, who are just cutting down spending and borrowing, as they brace for a slower oil price recovery and an even slower pick up in spending.”
The Saudi ministry spokesman said the oil sector was not the main driver for economic recovery.
“The government has taken some measures to increase non-oil revenues during 2020, including the increase in the VAT and customs rates. The continued economic recovery will enhance revenues from these measures, with a full-year impact next year, which represents the main source of increase in non-oil revenue expected in 2021,” he said, adding there was no intention to introduce new measures.
Bahrain, Oman, Kuwait, and Dubai, meanwhile, have all cut government expenditure this year. Their finance officials did not respond to requests for comment.
Regional central banks have provided large stimulus packages to stem the impact of the coronavirus outbreak on their economies, but government support in some cases has been significantly smaller.
In the UAE, it accounted for 2 per cent of GDP against a central bank package of measures worth 20 per cent of GDP, the IMF has said.
By comparison, Fitch Ratings estimates fiscal support measures announced since March range around 20 per cent to 35 per cent of GDP in countries such as the UK, Italy, Japan and Germany.
The Saudi ministry spokesman said Saudi fiscal support was not constrained, and that the government was taking measures “required to protect lives and livelihoods and ensure economic recovery.”
He said the government also implemented fiscal discipline measures “to preserve stability and sustainability.”
The tighter fiscal measures are already weighing on economic activity, with business conditions deteriorating in Saudi Arabia and the UAE in August, according to Purchasing Managers' Index (PMI) data.
“August’s whole economy PMIs from across the Middle East and North Africa all fell adding to the signs that activity in the region has plateaued amid fiscal austerity and continued virus containment measures,” said London-based Capital Economics.
“We expect recoveries from the current crisis to remain slow-going.”
As economies shrink and balance sheets deteriorate, governments are likely to try to lock-in even more long-term, low-rate debt in the coming months, after having already raised nearly $50 billion in the international debt markets this year.
Dubai came back to the public debt markets this month for the first time in six years, raising $2 billion in a tightly priced deal, in a sign that markets remain open for the region despite the downturn.
S&P Global Ratings estimates GCC central government deficits to reach about $490 billion cumulatively between 2020 and 2023. It expects GCC government debt to surge by a record-high $100 billion this year.
As governments tighten the purse strings, economic nationalism has gained momentum in some countries, with governments moving to protect citizens' jobs and wages amid concerns austerity measures could trigger political upheaval.
Kuwait has been trying to introduce laws that would reduce the number of migrant workers in the country, Oman ordered state firms to replace foreign employees with nationals, and state energy giants Saudi Aramco and Qatar Petroleum have laid off mostly foreign workers to reduce costs.
“The initial economic policy response of the region’s governments has included more familiar measures than radical experimentation,” said Robert Mogielnicki, a resident scholar at the Arab Gulf States Institute in Washington.
“If a fundamentally different political economy of the Gulf region is on the way, then it has not yet arrived.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.