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Analysts say that a prolonged or permanent split between Qatar and the (P)GCC nations opposing it would put a dent in the country’s plans for a diversified economy.
Analysts say that a prolonged or permanent split between Qatar and the (P)GCC nations opposing it would put a dent in the country’s plans for a diversified economy.

(P)GCC Still Struggling to Adjust

Absent a rebound in oil prices, analysts say it’s unlikely that the six Arab states can repair their finances without deeper spending cuts that could further hurt growth. The standoff between a Saudi-led bloc and Qatar is also undermining investor confide

(P)GCC Still Struggling to Adjust

Energy-rich (Persian) Gulf Cooperation Council Arab nations have scrambled to adjust to the slump in oil prices since 2014. Three years on, their economies are mired in weak growth and largely just as dependent on crude as they ever were.

The six members of the (P)GCC (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman) have curtailed subsidies and introduced new taxes to bolster non-oil revenue and reduce ballooning budget deficits. Much of the savings, however, have been due to spending cuts and the pace of reforms has slowed across the region, said Monica Malik, chief economist at Abu Dhabi Commercial Bank. Overall progress in economic diversification has been limited, she said, Bloomberg reported.

Absent a rebound in oil prices, analysts say it’s unlikely that these nations can repair their finances without deeper spending cuts that could further hurt growth. The standoff between a Saudi-led bloc and Qatar is also undermining investor confidence at a time when the (P)GCC states are seeking foreign funds.

The first-quarter budget data from Saudi Arabia and Oman showed an improvement in their budget deficits alongside higher oil revenue, after the price of Brent crude rose to as high as $57.10/bbl in January. It has since retreated under $50, well below what the two nations need to balance their budgets.

Saudi Arabia, OPEC’s biggest producer, increased non-oil revenue in 2016 and introduced taxes on tobacco products and soda drinks in June this year. The government, however, reversed a decision to cut the bonuses and some allowances of state employees. A second round of subsidy cuts will also likely be delayed to later in 2017 or early next year, according to people with knowledge of the matter.

Growth Suffers

The average cost of protecting government bonds of Saudi Arabia, the UAE, Kuwait and Qatar was at a three-year low about six weeks ago, when the Qatar dispute erupted. It has since jumped by about 40% to 94 basis points, according to data compiled by Bloomberg.

“The Qatar situation has added an element on the political and economic risk side, so it is not surprising to see risk perceptions going up,” said David Butter, associate fellow at Chatham House in London. “Most countries in the (P)GCC are still in relatively solid financial positions,” he said, but there are “underlying issues” around the long-term sustainability.

Austerity measures and oil-output cuts are weighing on economic growth in the region. The Saudi economy contracted in the first three months of this year for the first time since 2009. The International Monetary Fund expects average growth in the (P)GCC to slow to 0.9% this year, compared with 5% during the last oil boom between 2000 and 2013.

“We’re going to see poor levels of growth across the (P)GCC on lower oil production, although they’ve been helped in the first quarter by the relatively higher prices,” Butter said.

Vulnerable Pair

Bahrain and Oman have the lowest credit ratings of the (P)GCC nations, with less oil to sell, thinner fiscal buffers and in Bahrain’s case, more debt. That picture is unlikely to change unless crude prices rise dramatically. Bahrain needs $101.1/bbl for its budget to break even, the highest among Middle East and North African net oil exporters, according to the IMF.

Oman’s budget deficit soared to about 21% of GDP last year, the highest in the (P)GCC. Official data shows little progress made on fiscal consolidation in the first four months of this year.

Yet for Qatar, the world’s biggest exporter of liquefied natural gas, the economy’s reliance on hydrocarbons is proving to be a blessing in disguise. Revenue from LNG and oil exports has remained intact through the diplomatic row.

And while Standard Chartered Plc economists expect Qatar’s non-oil economy to slow this year as a result of the crisis, they still see overall gross domestic product expanding 2.5%—little changed from 2016.

While Qatar, the world’s biggest exporter of liquefied natural gas, is still getting revenues from hydrocarbons and insists that it has enough reserves of cash and gold to weather the storm indefinitely, analysts say that a prolonged or permanent split between Qatar and the (P)GCC nations opposing it would put a dent in the country’s plans for a diversified economy.

 

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