Pandemic, slumping oil prices test Gulf economic diversification
By Omnia al-Desouki
Dubai, Apr 2 (efe-epa).- The recent plunge in oil prices amid a price war between Saudi Arabia and Russia, and the coronavirus crisis have left plans to diversify the economy of the hydrocarbon-dependent Gulf countries hanging in the air.
This is not the first time the Gulf Cooperation Council (GCC) economies have faced oil price challenges, but this comes at a time many are trying to overcome their dependence on oil by boosting other sectors like tourism, education and innovation.
In 2016, Saudi Arabia launched its Vision 2030, a project to diversify the kingdom’s economy and generate alternative sources of income.
The project’s name echoes the one chosen by Abu Dhabi in 2008 to transform the emirate’s economy.
Following the 2014 oil price slump, some countries introduced Value Added Taxes (VATs) and other reforms to improve economies.
But the current situation can ruin all those plans.
“The need for a multi-billion or trillion additional investment to support economic diversification efforts (Saudi Vision 2030, Abu 2030 etc) could be difficult to sustain in light of the current crisis,” Cyril Widdershoven, Director at Verocy, told Efe.
“Delays or putting projects on ice can be the outcome, as most diversification projects are long-term and will not generate additional cash or jobs in the first phase of implementation,” he added.
Widdershoven believes the diversification has not materialized to the point that “these economies are able to sustain shocks to oil and gas sectors.”
“Without any doubt, more investments are needed, speeding up projects will need to be done too,” he explained.
VCM International senior advisor Abdelsamie Felfe told Efe that “energy-rich countries who have succeeded in diversifying their economies in the last two decades will have minimum negative impacts” while those who started the economic diversification process in the last decade “will need to review and enhance the implementation of their economies.”
Gulf countries have announced stimulus packages to fight the crisis but could be forced to issue bonds, debt or seek financing in international markets.
“Based on various specialized sources, the surplus of oil could range between 1 billion and 1.5 billion barrels by end of June 2020,” Mohamed Chemingui, senior economist and chief of the regional integration section of the United Nations Economic Commission for Western Asia in Beirut (ESCWA), told Efe.
“In other terms, the full global storage capacity will be filled even before the end of May 2020 and the market will not be able to absorb any additional surplus for both crude and refined oil,” he added.
With economies basing their budgets on oil prices of $45 per barrel or higher, GCC government budgets are expected to be slashed, as budget deficits will become apparent.
Their expenditure will change. According to ESCWA, the Arab region will lose $42 billion in 2020 due to the global coronavirus pandemic, although the figure may rise.
On Monday, credit rating agency Moody’s placed the ratings for both Kuwait and Oman on review for a downgrade given the government’s liquidity risks.
“This is an unprecedented situation and the economic and financial impacts on Arab oil-based economies will be catastrophic which calls for urgent macroeconomic reforms including both monetary and fiscal decisions,” Chemingui said. EFE-EPA