Persian Gulf: The challenge of balancing the budget with oil at $30

Oil price fluctuations are not new, but the economic crisis that is looming over the world due to the closure of a large part of the productive activity is. No one knows for sure how long the current pandemic will last or when the economy will recover; there is total uncertainty about the future. The Gulf countries are facing the pandemic with a poorly diversified productive sector dependent on hydrocarbons. Despite this, most of them are in a financial position that will allow them to hold out until the storm passes. These nations will be forced to readjust their public spending to the new situation in the hope that global demand will soon recover with the end of the lockdown.  

The brutal fall in oil prices due to the halt in production has been aggravated by Saudi Arabia's strategy to displace one of its main competitors, Russia, which further sank the cost of the barrel just as the pandemic was beginning to take hold. "The strategy has gone very badly, but despite this, the kingdom has a very solid financial situation thanks to its foreign currency reserves and its low public debt," Itxaso Domínguez, coordinator of the Middle East and North Africa of Fundación Alternativas, told Atalayar.  

The Kingdom's budget for 2020 was designed for a price of 77 dollars for each barrel of oil. Now, Saudi Arabia has been forced to reduce its public expenditure by 5% and has been in favour of increasing its public debt from the current 30% to 50%. A recent report by the International Institute of Finance (IIF) predicts that the country's deficit could reach 14% this year.

"In the long term, oil price fluctuations are not going to be a problem for the Gulf countries. But in the short and mid-term they will be forced to reorganise their budgets and prioritise their public spending," says Atalayar Mitchell Belfer, president of the Rome-based think tank Euro-Gulf Information Centre. Belfer is confident that oil prices will recover over the next five to six months. Riyadh has made it clear that it will not touch its sovereign wealth fund money, despite the complicated situation, and is taking advantage of the moment to acquire stakes in several oil groups such as Shell, Total, Repsol, Equinor and Eni, the Newcastle football club and the cruise ship operator Carnival.  

For the Gulf countries, the COVID-19 health crisis has come at one of the worst moments: when they were about to launch their reform agenda aimed at diversifying their economy. "Bahrain and the Emirates have already made very important investments in sectors related to technology and innovation, and Saudi Arabia is considering orienting its production system towards tourism and entertainment. They are well aware of the fluctuations in oil prices and have therefore started to modernise, but the outbreak of the coronavirus is stifling the income of new sectors of activity," regrets the president of the Euro-Gulf Information Centre.

The changes that could come after the pandemic for these countries consist of a strengthening of their relationship with the European Union and greater innovation in the sectors related to medicine and technology. "The EU's confidence in China has declined during the crisis and it is likely to look for new partners, including the Gulf countries," says Belfer. 

"Saudi Arabia, the United Arab Emirates, Kuwait and Bahrain have great flexibility in adapting their budgets in times of crisis. They know that their economies are very interconnected and the agreements between them are constant to guarantee monetary stability in the area, as during the manipulation of the dinar that Bahrain suffered a few years ago," said the director of the think tank.  

Oman and Qatar, outside the strategies of the other Gulf countries, will experience this crisis more acutely. "Oman is having a hard time because it doesn't have as many resources as its neighbours," explains Itxaso Domínguez. On the other hand, Qatar is one of the countries that will be most affected by the health and economic crisis as a result of its enmity with Saudi Arabia, Bahrain, the Emirates and Egypt. The country is facing this crisis in regional isolation and with growing problems in its diplomatic relations with the United States. "It has chosen to deepen its ties with Iran, which has become the epicentre of the pandemic in the Middle East and is a very unstable ally," Belfer said.