War in Yemen! War in Syria! Confrontation with Iran a diplomatic crisis with Qatar and now to top it all off the coronavirus crisis and the devastating collapse in oil prices. The Persian Gulf countries have been living on the […]
War in Yemen! War in Syria! Confrontation with Iran a diplomatic crisis with Qatar and now to top it all off the coronavirus crisis and the devastating collapse in oil prices.
The Persian Gulf countries have been living on the brink of a nervous breakdown. For a few years now and we’re talking about some of the richest countries in the world at least given the immense fortunes that the royal families that govern these countries control.
Consulting firm Oliver Wyman in early 2020 the consulting firm estimated that the six countries that make up the Persian Gulf Cooperation Council namely Saudi Arabia, United Arab Emirates, Kuwait, Oman, Bahrain and Qatar.
They all collectively control assets worth almost a staggering 44 trillion dollars yes trillions three point three trillion dollars invested through its sovereign wealth funds and just over 40 trillion in oil and natural gas reserves.
To give you an idea that works out to more than 1.3 million per inhabitant this is a huge source of wealth that these countries could use to maintain very high living standards modernized their economies and maintain significant global influence.
However the coronavirus crisis has turned all these forecasts upside down and left us with news like this: “Jobless migrants fleeing reach countries to the chagrin of their home countries lesions of foreign workers are leaving Gulf nations wall street journal”.
So what is going on in the Petro monarchies and in the Persian Gulf?
What sort of future do they face is their story of money riches and power come in to an end which countries will be most affected?
But first we will answer a question that many of you must have asked yourself more than once. Why on earth should I care what happens in a part of the world where there is little more than deserts and camels.
Why should we care what happens in the Persian Gulf?
Well let’s find out virtually every economy in the world is suffering from the effects of COVID-19 and certainly the countries in the Persian Gulf are no exception.
Off course they are facing a double crisis a one hand like most countries; they have to put in place social distancing and confinement measures and to close public spaces and businesses.
On the other hand they’re dealing with a huge fall in oil prices, there has been a direct result of the sudden and unprecedented collapse in demand. To give you an idea during the first five months of 2020 the price of oil fell by almost 50 percent and that’s despite these countries cutting production and of course rock-bottom prices and lower production means far far less revenue for Gulf petro monarchies.
The amounts involved is so large that more than a couple of you would be left speechless, but why should we care about all this well let’s say that from a geostrategic point of view the Persian Gulf countries are much more important than we might think at first glance and their importance is based on these three factors.
So the first one I’m sure I’m sure you are very clear about this region is home to the largest oil and natural gas deposits on the planet approximately 35 percent of all oil produced in the world comes from the Persian Gulf but that’s not all.
The second reason this part of the world is so important is because of its key in world trade it’s usually something that goes unnoticed but this area of the world is a key hub for the world’s busiest sea and air routes most routes connecting Asia Africa and Europe pass through here that explains why some of the largest ports and airports on the planets are located in this region.
18 percent of all global rice production 16% of all wheat production and 30% of the fertilizer trade passes through this region and of course if instead of rice or wheat we talk about Chinese manufacturing the situation is not dissimilar.
We need the Middle East not for its oil but precisely because it sits in the middle of a global market that secures our global energy supply and even more important Middle East facilitates the transit of the goods that we and other countries use to grow.
We cannot forget the enormous religious and social weight these countries have in the Muslim community around the world in a nutshell those are the three reasons why the Persian Gulf is so important and let’s not forget that these countries have some of the largest reserves of money in the world.
We’re talking about almost three and a half trillion Petro dollars that is these countries alone could put the entire world’s financial books in order.
Now that’s really saying something however in spite of everything the last few years have not exactly been good for any of these countries and now the coronavirus threatens to be the last straw.
According to data from the International Monetary Fund in the last four years alone the net financial assets held by the six Persian Gulf monarchies have been reduced to 500 billion dollars and that’s not all this year all these countries are expected to close with double-digit deficits in 2020 alone the Sheikhs are going to lose more than two hundred and twenty billion dollars over the course of a year and I know what some of you were 200 billion dollars that’s rough but they will still have more than three trillion bucks in their pocket what’s the problem.
Well if you think like this you’re not taking into account some of the finer details for example the IMF has estimated that if things don’t change dramatically the Gulf Petro monarchies will see their enormous financial wealth just disappear in just over a decade and take note because we are talking about money that is supposedly meant to ensure the economic viability of countries that have a very young population a lack of jobs and which today remain completely dependent on the price of oil.
This dependence is the reason why these countries have launched all kinds of multi-million dollar projects to try and diversify their economies and generate new sources of wealth over the past two decades in the early 2020s.
Alone real estate mega projects in the Gulf accumulated committed investments worth almost one trillion dollars now we are talking about mega ports new cities built from scratch stadiums resorts etc.
However such initiatives have generally had disappointing outcomes a lot of money have been spent to get rather poor results and to top it all off now because of the coronavirus.
Projects built over the last few years promised to reap huge losses you see the mighty petro monarchies in the Gulf now face an uncertain future they have to maintain a high standard of living with dwindling fortunes very young cities with high rates of population growth and ever-increasing levels of unemployment.
If the crisis and oil prices do not recover soon these countries could have a very hard time of course not all countries are the same. Saudi Arabia for example is one of the countries that could suffer the worst over the next few years let’s take a look a great power with leaden feets. According to news headlines during the coronavirus crisis we might think that Arabia is calmly taking advantage of the chaos to build its strength. Saudi’s sovereign wealth fund by Styx and Facebook Boeing Cisco Systems Wall Street Journal a bargain hunter who has even just bought a football team Saudi wealth fun agrees to 300 million pound deal to buy Newcastle United.
Financial Times however hold on a moment because the reality is very very different in the last decade Saudi Arabia has tried to become a superpower. Over the past 10 years this country has had the third largest military budget in the world behind only the United States and China three billion dollars five hundred and thirty three million dollars five hundred and twenty five million dollars that’s peanuts for you who’s triggered its own war in Yemen and has had a very heavy-handed foreign policy the blockade of Qatar and the conflict with Iran have been good evidence of this.
You can imagine these whims have not been cheat since 2015 Saudi Arabia’s public deficit has averaged nearly 11 percent each year this has caused the government reserves the Saudi Treasury to have shrunk by more than 200 billion dollars while its public debt has increased fivefold from 5 to 25 percent of GDP and now coronavirus and the collapse in the oil price are going to cause the 2020 deficit to far exceed a hundred billion dollars that is at this rate in just over three years.
All accumulated oil wealth could disappear be gone completely and that would create a very difficult halter plug because the Saudi economy basically depends on public spending you will reduce expenditure if God wills even if some of the steps taken will be painful but they are for the benefit of everyone for the benefit of the country and for the benefit of the citizens welcome at algid on finance minister of Saudi Arabia and that’s precisely what they’ve done so far the Saudi government has already announced that it will triple the tax on purchases from 5% to 15%.
It will also cut employee pay by 270 dollars a month and put on hold many of the investment projects the country had launched to try and diversify its economy however none of this may be enough in Saudi Arabia.
The vast majority of society lives directly or indirectly from public spending and that way of life is what maintains stability and loyalty to the Saudi royal family the ruling royal family the government understands that in this case the carts have a limit but what does this situation mean for the future well.
I think we can say that the long term scenario could be very good or very bad for the rest of the world let me explain with a very young population and an unemployment rate that will soon exceed 15% the crisis may force the Saudis to reform the country from top to bottom which would be reasonably good or in contrast it may fuel the discourse of the most radical religious leaders as was the case in the 1990s and that would be bad something really bad for everyone but Saudi Arabia is not the only country with problems.
Even places as rich as Kuwait or Dubai now face severe turbulence take a look the pearls of the Gulf until it was invaded by Saddam Hussein’s troops in 1990 Kuwait was considered the Pearl of the Persian Gulf a stable tremendously rich country with some of the most advanced institutions in the region.
Indeed curates political system is considered akin to a parliamentary monarchy all adult men and since 2006 also women with Kuwaiti nationality have the right to vote every four years.
A unicameral parliament is elected that appoints the Prime Minister passes laws oversees the government and approves budgets and it’s also a tremendously rich country.
Iit’s basically a small state that sits on gigantic oil fields to give you an idea while the population with creating nationality amounts to just over 1 million inhabitants proven crude oil reserves exceed a hundred billion barrels the sixth largest reserves on the planet a situation in which this small country has managed to create a huge sovereign wealth fund the Kuwait Investment Authority which has invested more than 500 billion dollars worldwide stocks real estate debt gold and perhaps that’s also why it’s the Gulf country that has made the least effort over the past few decades to diversify its economy to such an extent that today more than 90% of the government’s total revenue depends directly on black gold.
Therefore it follows that if the price of oil sinks you can already imagine what happens to the accounts of this small country between failing oil prices and the government plans to deal with the coronavirus crisis the National Bank of Kuwait one of the largest local banks has predicted that the public deficit will be 40 percent of GDP in 2020 yes yes that’s right 40 percent of GDP clearly his situation is very different from that of Saudi Arabia their reserves of money and oil per capita are much larger but even this country has problems with a rapidly growing population.
Kuwait increasingly knees higher oil prices to balance its budgets meanwhile the other great pearl of the Gulf Dubai also faces serious problems although Debye is not so dependent on oil the problem has been the collapse of tourism and commercial activities the two great areas in which this city specializes a city that counts among its assets the largest International Airport in the world one of the largest airlines the largest shopping center the most luxurious hotel and one of the 10 largest ports on the planet joint projects that have essentially been financed with debt.
To give you an idea according to the consulting firm Capital Economics devised sovereign debt amounts to 110 percent of GDP while the debt of public companies is another 80 percent in total almost 200 percent debt over GDP and now the coronavirus is making news like this, “seventy percent of Dubai companies expect to go out of business within six months due to coronavirus pandemic survey says CNBC” and this is something that adds to the situation that was already fragile as we mentioned earlier.
Dubai’s economy has been pretty bad for a few years for example since 2014 property prices have fallen by 30 percent and that’s not all now the city faces a whole exodus of expats that will reduce is population which creates another problem a lower population means less occupied housing less consumption etc.
We are facing a minimum population contraction of 10% during 2020 Nasser al-sheikh former head of Dubai’s finance department of course Dubai keeps an ace up its sleeve they can always phone a friend like back in 2009 when their comrade and neighbor Abu Dhabi richest emirate in the world came to their aid and leds Dubai all the money that they needed.
Of course the question that many may ask is what will Abu Dhabi ask in return what trade-offs will it demand can do by reinvent itself again anyway this is the situation that the petro monarchies of the Persian gulf are going through today as you could see coronavirus has wreaked havoc even in some of the richest places on earth and the question is all these countries managed to reinvent themselves can they escape their oil addiction.