GCC’s honeymoon with oil is over

 By Criselda Diala-McBride

The Arabian Gulf region has come a long way economically since oil was first discovered in its sands in the late 1930s. Crude oil has allowed nations to become global powerhouses, capable of the most ambitious projects the world has ever seen and attracting millions of expatriates from over 200 countries, with its tax-free environments. But with oil losing 70 percent of its value, a paradigm shift is in the offing…

For nearly eight decades, hydrocarbons have defined the economic makeup of Bahrain, Kuwait, Oman, Qatar, the United Arab Emirates and Saudi Arabia – the countries that make up the Gulf Cooperation Council (GCC).

Accounting for almost 30 percent of the world’s proven oil reserves and more than 22 percent of global natural gas reserves, the Arabian Gulf has developed the economic muscle to build the world’s most ambitious structures; grow its affluent population; and lure millions of expatriates to its shores, thanks mainly to its booming commerce and tax-free environment.

However, with the “black gold” losing its luster as it trades at around $39 per barrel, or 70 percent lower than its June 2014 price, GCC states can no longer rely on oil and gas as their staple export. The downbeat sentiment surrounding crude oil is reflected in the gloomy near-term outlook for the region’s economy, with Standard & Poor’s recently downgrading the credit ratings of Bahrain, Oman and Saudi Arabia, while the International Monetary Fund forecasts Gulf GDP growth to be minimal, at 2.75 percent in 2016.

IMF managing director Christine Lagarde’s statement that regional export revenue losses stood at $275 billion in 2015 alone, presents the stark reality of how the oil-price slump is deflating GCC nations’ cash cushions. “The fiscal and current account balances in the region are deteriorating sharply, with the fiscal balance projected by the IMF to be in a deficit of 12.7 percent of GDP in 2015,” Lagarde says.

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While GCC governments have expressed commitments to diversify their oil-reliant economies, it was only in the wake of tumbling oil prices that revenue-generating reforms were introduced. Changes began with fuel-subsidy cuts in 2015, and continued with the announcement of a 5-percent value-added tax (VAT), which will be implemented across the region as early as January 2018. Most recently in the UAE, Dubai International Airport said it will charge departing passengers a AED35 ($9.54) service fee, effective from June 30, 2016.

The reforms may be bitter pills to swallow for expatriates and residents in what was formerly known as a zero-tax region, but Moody’s says they are essential in “relieving pressure on government balance sheets and [determining] GCC sovereigns’ fiscal trajectories.” The ratings agency estimates savings from subsidy cuts and income from VAT will collectively average 2.5 percent of the region’s GDP, but this will not be enough to solve looming fiscal challenges.

Despite these developments, Andrew Korn, partner at KPMG Lower Gulf, believes that oil and gas revenues will continue to contribute meaningfully to global economic growth in the long term. “With regard to expected economic reforms, a carefully managed tax policy, which provides continued incentives for foreign companies to invest in the [GCC] region, can go a long way [towards] fueling local growth,” he says.

In an earlier statement, Dr. Marie Owens Thomsen, chief economist at Indosuez Wealth Management, says the plunge in oil prices has not yet prompted the global economy to enter a recessionary period, with average growth still projected at 3 percent. Although she admits that the present scenario is hurting oil exporters such as those in the Arabian Gulf.

“Inflation has risen and will rise further when VAT is introduced,” she says. “At this stage, it is important to note that GDP growth is still positive, and inflation is under control. However, there is arguably a time limit to this – the longer the oil price stays at extremely low levels, the more precarious the situation for the economies in the region.”

Source: Bloomberg

Korn points out that ongoing efforts to tap into the GCC’s renewable energy potential are crucial in today’s market conditions.

“[GCC] countries have generally used their wealth wisely, to stimulate sustainable economic growth in the region. The shift towards cleaner energy is evident, [for example,] in the UAE’s increasing reliance on district cooling technology and projects such as solar power plants,” he says. “The [UAE government’s] pledge to increase clean energy’s share of the national mix [to24 percent by 2021] will help make the country a global center of renewable energy innovation.”

The International Renewable Energy Agency (IRENA), in its latest report, indicates that the GCC has much to gain from developing alternative energy sources. “Achieving the renewable energy plans for the electricity sectors in the region can result in cumulative savings of 2.5 billion barrels of oil equivalent [between 2015 and 2030],” the agency wrote. This could translate to overall savings of as much as $87 billion, in addition to the creation of an average of 140,000 direct jobs per year.

“The region is well endowed with renewable energy resources, with an abundance of solar irradiation in particular,” according to the report. “Areas in Kuwait, Oman and Saudi Arabia also have wind resources [between 5 and 7.5 meters per second]. Technologies such as biomass and geothermal power may hold additional potential but are relatively underexplored.” In addition, the report advised the exploration of waste-to-energy as another viable renewable-energy technology.

The GCC’s love affair with oil may be waning, but past and current investments in renewable energy projects could offer the region a chance at a more sustainable economic future.


SEE MORE: The bridge to post oil future by Criselda Diala-McBride


about the author
Criselda Diala-McBride
Dubai-based journalist with 20 years of experience writing and editing finance, aviation, tourism, retail, technology, property and oil and gas articles for a range of print and online publications.