Many questions arise regarding the ability of Gulf economies to bear the consequences of the oil price collapse, more so as the bloc has always attracted the most attention among all oil producers.
Hence, these economies are the most likely to be subjected to enquiries; sometimes these are done in good faith by those keen for the Gulf economies to remain strong and stable. At other times they are done by malicious individuals who do not look at their deteriorating economies despite their obscene wealth, such as our Iranian neighbour that still clings to the myths of empires ...
The truth everyone knows is that the Gulf states are best placed among all oil producing economies. They are also the most capable of dealing with the repercussions of the collapse in oil prices by a large margin to settle below $50 a barrel for many reasons.
The first is that the GCC countries — and especially the UAE, Saudi Arabia, Kuwait and Qatar — have accumulated large cash surpluses over the past five years, which allow them to cope for several years at current price levels or even in the event of their falling to lower levels. As for Oman and Bahrain, those are two small economies that can be assisted to adjust through the others’ backing.
Secondly, huge cash assets have accumulated in an unprecedented manner at Gulf banks. So in the event of budget deficits, it will be possible to seek refuge in the local bank sector through issuing bonds or sukuk to cover the deficit and without having much of an effect on general economic conditions.
At the end of the 1990s when oil prices collapsed, Saudi Arabia resorted to this method of borrowing, where the internal sovereign debt volume exceeded 100 per cent of the kingdom’s GDP. Once oil prices doubled, the Saudis repaid quickly to turn the ratio to zero. It is also a fact that the same figure in Japan is 200 per cent of the GDP.
Hence internal debt can be effective than foreign sourced ones and can be handled with greater flexibility.
Third, GCC countries can make financial reforms that will help them cope with declining prices, including reviewing subsidies, imposing of value added tax and reducing spending on some less necessary items.
These and other measures of financial instruments will allow the countries to adapt and maintain economic stability and achieve good growth rates in light of falling prices. It is true that there are aspects of higher spending imposed on GCC countries, such as aid for Syrian and Iraqi refugees and the war in Yemen. However, GCC countries should be able to easily deal with this.
Foreign aid is a constant item on GCC countries’ financial agendas since more than half a century ago. Moreover, a big part of war spending comes as part of defence and security allocations, and dealing with the temporary rise of these credits is possible.
Some may say that this is a biased local and Gulf point of view despite the fact that we are convinced it is an objective outlook taking into account the large financial capacity of GCC countries which cannot be recorded in detail in this article.
But let’s take an impartial and well-informed Western perspective. A former chief of British foreign intelligence, John Sawers, told CNN, “I think we have seen Saudi Arabian resilience over the years, as the size of domestic debt is low and there are huge reserves, while the cost of oil extraction amounts to $10 a barrel only. “Thus, oil prices reaching $40 a barrel is not a big problem for them in principle.“
What applies to Saudi Arabia in this regard also applies to the UAE and economically similar Gulf states.
Therefore, the Gulf’s economic growth will continue over the next three years despite the significant decline in oil prices, which may continue to drop in the coming period. However, they should resume a climb back to normal levels due to high demand, which will result in improvement for the overall global economy, and especially big ones.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.
