Arab states on the shores of the Persian Gulf claim that they have more than enough margin of safety to survive difficult times. However, more and more evidence suggests otherwise. Excessive dependence on oil has now put oil-producing countries in a very difficult position. According to S&P Global Ratings, the total budget deficit of the six members of the Gulf Cooperation Council (GCC) with an oil price of around $40 in 2000-23 could reach almost half a trillion dollars (490 billion). The current year will probably be anti-record, in which the deficit is projected to grow by about 100 billion.
On the one hand, the cost of oil production in Saudi Arabia is one of the lowest in the world, but forty dollars a barrel is not enough for it to have a balanced budget. The IMF estimates that the largest economy in the Gulf needs a price of $76.1 a barrel this year. At the current price, the kingdom expects a budget deficit of 11.4% by the end of the year. As a reminder, oil provides KSA with 87% of the budget, 90% of export earnings, and makes up 42% of GDP.
Riyadh denies that it is pursuing austerity policies and claims it is living on a budget adopted last December, before the pandemic. Nevertheless, the kingdom has tripled its income tax, announced spending cuts in a number of areas that are not considered vital, and temporarily suspended payments to state employees of premiums for high prices.
The position of the rest of the GCC is no better. So, for the UAE in the current fiscal year, the deficit-free price of a barrel of oil is 69.1 dollars; for Kuwait - 61.1; and for Bahrain and Oman вЂ” 95.6 and 86.8, respectively. And only Qatar will be able to end this year without a deficit because the price required for this is $39.9 per barrel.
Improvements, at least in the near future, should not be expected. Goldman Sachs analysts predict that the price of a barrel of oil in the third quarter of 2021 will reach $65, but the vast majority of specialists are less optimistic. For example, a recent Reuters study estimates the average price of a barrel of Brent crude will be $50.45 in 2021. But even this price is very far for most of the Gulf countries from what they will have enough for a deficit-free budget. For example, Riyadh will need $66 per barrel for this next year.
Austerity has a depressing effect on economic activity in the GCC. The conditions for doing business have deteriorated especially in Saudi Arabia and the UAE.
Reduced economic activity is putting strong pressure on banks in the region. In order to survive, they have to merge. The Saudi Central Bank вЂњSaudi Arabia's Monetary AgencyвЂќ announced a program to help the kingdom's banking system in the amount of almost $27 billion.
Despite the fact that the UAE economy is perhaps the most diversified in the region, it continues to be very dependent on oil. Oil revenues account for almost a third (30%) of the emirates' budget. The only exception to the very high dependence on oil is Dubai. Qatar, which ranks 17th in the ranking of oil-producing countries, has more than 60% of its GDP from oil and gas. The oil and gas industry accounts for 85% of exports and approximately 70% of government revenues. Oil provides 68% of Oman's GDP and 85% of government revenues. This year, the sultanate faces one of the largest deficits in history, around 20%.
The only way for GCC countries to cover huge budget deficits is through debt markets. As long as they have nothing to complain about, they get huge loans and borrowings without any problems. The Arab monarchies of the Gulf have already taken out loans for almost $50 billion this year. The last two billion loans were received in September by Dubai. For him, by the way, this is the first external borrowing in six years.