Profiling the Economic Interests of the Gulf States

15 MINS READJul 15, 2015 | 09:00 GMT
The Gulf Cooperation Council states of Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain, Qatar and Oman face daunting economic challenges.
Editor’s Note

This is the final installment of a three-part series exploring the economic challenges faced by the Gulf Cooperation Council states: Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain, Qatar and Oman.

Taken as a whole, the Gulf Cooperation Council is wealthy both in terms of actual funds and in terms of existing energy reserves. Taking a look at the six individual nations within the regional bloc, however, reveals a much more nuanced picture. Some of the members are weaker than their neighbors and the economic initiatives of individual governments vary greatly. These diverse fiscal and economic policies and their underlying imperatives have impeded previous attempts to forge a common currency. The current downturn in oil prices has highlighted the extent to which the individual members of the GCC will continue to prioritize their own, competing policy initiatives. From Kuwait's careful economic planning to Bahrain's rising debt levels, the GCC encapsulates several distinct economic profiles.

Saudi Arabia

Saudi Arabia has the largest economy, oil reserves, export levels and population on the Arabian Peninsula. Beginning in the early 2000s, Saudi Arabia's currency reserves skyrocketed — reaching a high of $737 billion in August 2014. Current central bank data shows that this number dropped to $707 billion as of February 2015. Falling oil prices coupled with a nearly $30 billion package of grants and bonuses paid to citizens following the death of King Abdullah earlier this year are taking their toll on Saudi reserves. The Ministry of Finance estimated the 2015 budget deficit to be $38.6 billion; a marked difference from the $54.9 billion surplus the kingdom posted in 2013. The kingdom, unlike its neighbors, does not have a sovereign wealth fund. Instead, Riyadh holds revenue as currency reserves in the country's central bank, the Saudi Arabian Monetary Agency. Another large pool of money is held by the kingdom's pension agencies, estimated to currently have over $250 billion.

Saudi Arabia is perhaps the most conservative of the six GCC members when it comes to investing its funds abroad. Riyadh's experience with declining oil prices in the 1980s and in 2009 — and the subsequent increase in debt and the selling of foreign assets — has pushed the kingdom to pursue more stable investment opportunities such as treasury bonds and equities instead of the higher profile investments and purchases its neighbors make.

Another factor shaping Saudi Arabia's investment behavior is its relatively large domestic population. The Saudi population in 1950 was approximately 3.1 million. Today, the population stands at over 28 million. More than 50 percent of Saudis are under the age of 25. Riyadh's GDP per capita is significantly lower than those of its neighboring GCC states, and issues of employment and housing are a much greater concern in Saudi Arabia than in neighboring states. Because of its large population, Saudi Arabia spends the most of any country in the world on fuel subsidies, which provide cheap gasoline, diesel and fuel for power plants. In recent years, annual subsidies have reached more than $50 billion. Though the fall of oil prices is an overall strain on the kingdom's finances, it has helped reduce the cost of government subsidies on energy.

Saudi Arabian key economic indicators

United Arab Emirates

The United Arab Emirates is a collection of seven emirates, led primarily by Abu Dhabi with support from Dubai. Abu Dhabi is the largest emirate, and holds the bulk of the country's hydrocarbon reserves. Dubai's production, however, has steadily declined since the early 1990s, prompting the local government to embark on an ambitious diversification project. Today, the United Arab Emirates is one of the most diversified economies of major oil exporters in the Middle East, though the country is still heavily dependent on oil exports, as seen in Abu Dhabi's bailout of Dubai following the 2009 real estate market crash. Abu Dhabi still has the largest share of the economy, followed by Dubai and Sharjah. These three largely subsidize the four remaining smaller emirates, though Fujairah has taken advantage of its position along the Gulf of Oman to invest in oil bunkering, transshipment as well as oil and natural gas pipeline projects.

The United Arab Emirates' domestic structure allows the overall federal budget to remain quite small (the 2015 budget is $11.2 billion, the largest since 2009), and the country is not expected to run a deficit in 2015. The economic outlook for Abu Dhabi, the economic center of the union, is more mixed for 2015 because of its local dependence on oil exports. Economic growth is expected to slow to less than 3 percent in 2015, down from the steady 4 percent of recent years, according to unnamed government sources.

Abu Dhabi is expecting a budget deficit, and though official budget estimates and figures are not generally released, Abu Dhabi's large offshore holdings and investments will help cushion the emirate while oil prices are low. Oil will contribute a much smaller share of Dubai's budget in 2015 (less than 5 percent), but the emirate's financial and banking sectors rely on the overall economic health and stability of the region. Since the 2009 downturn, more stringent controls have been placed on the UAE economy, however, and the considerable budget surpluses of recent years have been invested to help Abu Dhabi and Dubai manage a short-medium term drop in oil prices without having to resort to structural reforms at home.

UAE key economic indicators


Kuwait, a tiny emirate wedged between Saudi Arabia and Iraq, has essentially functioned in recent decades as a city-state with the world's sixth largest oil reserves. Like its neighbors, Kuwait's economy has been tied closely to rising and falling oil prices. Kuwait's economy took a hit when Iraqi forces invaded in 1991, damaging oil infrastructure at a time when the Gulf region was still reeling from the crash of oil prices during the 1980s. Kuwait was the first to attempt to hedge against fluctuations in global oil markets by establishing the first sovereign wealth fund in the world in 1953. Since then, Kuwait was able to leverage its small population and geographic size to maximize periods of high oil prices. Careful economic management in subsequent decades has enabled Kuwait to rebuild its energy infrastructure and to start diversifying away from complete reliance on the petroleum sector, which makes up over 90 percent of exports and government revenues. The Mubarak al-Kabeer port complex on the island of Bubiyan will facilitate Kuwait's plans to encourage the growth of manufacturing, finance, and shipping and commercial services.

Kuwait is heavily dependent on its oil revenues, however, and falling oil prices resulted in quick action from the government. The emirate began cutting prices of crude oil while expanding volumes to Asian buyers, prompting competitors in Saudi Arabia, Iraq and the United Arab Emirates to follow suit. Kuwait's geopolitical position — wedged between Iran and Iraq — has resulted in a national policy to act independently of the GCC to maintain social stability and national security. Kuwaiti energy policy also reflects this independence, which is likely what prompted the country to deny permits to Chevron employees producing oil within territories disputed with Saudi Arabia.

Kuwait planned for an estimated $24 billion deficit in its 2015 budget, contrasting with several years of strong budget surpluses. The country has been a leader among the bloc's wealthier states in its slow but deliberate attempts at cutting subsidies and reducing social spending in the years following 2011's regional unrest. Kuwaiti leadership faced strong parliamentary opposition to attempts to slash fuel subsidies for diesel and kerosene earlier this year, ultimately reducing subsidy cuts, though much of the conflict was mitigated by the drop in the price of oil. Further permanent policy and spending changes are unlikely in 2015, as Kuwait has ample reserves and external investments to cover deficits in the short term and as the emirate wants to maintain social stability in the face of heightened threats posed by the Islamic Sate. The emirate also has one of the strongest balance sheets in the region and one of the lowest budgeted break-even oil prices; Kuwait could also borrow internationally taking advantage of its low borrowing costs as it works to secure market share and stimulate oil demand and consumption through lower prices.

Kuwaiti key economic indicators


Even in a region defined by historically poor, desert regions, the peninsular emirate of Qatar is one of the poorest. Modest commercial oil production took off in the 1960s, helping to bring development and economic opportunities to the emirate, but large-scale natural gas production and a growing liquefied natural gas export industry transformed Qatar beginning in the early 2000s. Over the past decade, Qatari spending on LNG and natural gas infrastructure — including the world's largest gas to liquid facility — and new domestic facilities has resulted in Doha having the largest external debt to GDP ratio in the GCC. Despite having one of the smallest native populations in the world at an estimated 350,000, a large influx of foreign labor has pushed the Qatari government to build power plants, desalination facilities, and housing for an expatriate community nearly six times larger than its native population. Qatar has one of the highest ratios of immigrants to native-born individuals in the world.

Qatar's push to develop new real estate projects and stadiums as part of a plan to be a global hub for international sporting events has also contributed to an increase in debt. Dominating the global LNG market by 2010 has helped Qatar manage its debt payments and rising social spending, but reliance on natural gas receipts does not mean that Qatar does not face the same challenges posed by falling oil prices as its neighbors.

Qatar sells nearly half of its LNG production on global spot markets and has seen LNG prices in Europe and Asia fall along with the price of oil. Rising output from Australia and North America is also eroding Qatar's position as the world's largest LNG producer as well as its ability to shape market trends. Still, Qatar's offshore North Dome natural gas field is the largest natural gas deposit in the world, and utilizing economies of scale Doha remains one of the lowest cost LNG producers in the world. The Pearl GTL plant enables Doha to export high quality diesel fuel without using diminishing crude oil production, and high volumes of condensate produced along with natural gas have increased Qatar's exports of hydrocarbon liquids, from 850 thousand barrels per day in 2000 to 1.95 million barrels per day in 2013. Doha planned its 2015 budget around an assumed oil price of $45 per barrel, much lower than many of its neighbors, but falling LNG spot prices will mean that the emirate will still have a higher budget deficit than its neighbors, albeit a more manageable one. Qatar's ambitious international investments, coupled with strong reserves at home, will help cushion the impact, but the emirate is unlikely to seek international loans to mitigate any deficits given its already high levels of debt.

Qatari key economic indicators


Rising oil and natural gas revenues were crucial to transforming Oman from a fractious state divided among three competing factions to the modern, stable state foreseen by current ruler, Sultan Qaboos bin Said al Said, when he took the throne in 1970. Oil and natural gas exports are the largest contributor to government revenue and GDP, but Oman has struggled with declining output in the past. Oman's hydrocarbon reserves are much more modest than those of neighboring Saudi Arabia and the United Arab Emirates, and during the mid 2000s Muscat had to import piped natural gas from Qatar to meet rising domestic consumption, while prioritizing domestic consumption production to meet contractual LNG export commitments. Oil production began a period of decline, and natural gas production stagnated, as in the early 2000s. Government investment into enhanced recovery techniques as well as expanded production into more difficult geologies with assistance from foreign partners such as BP have helped Omani production slowly but steadily climb in recent years. And this increase has enabled Muscat to take advantage of the most recent period of high oil prices.

But Oman remains one of the poorer nations of the GCC, and the other members pledged billions in aid to Muscat and Manama during the 2011 Arab Uprisings. Oman has since boosted public spending, directing billions toward services, infrastructure and education even as the Sultan's health has shown signs of seriously deteriorating. For this reason, Muscat has decided to continue with investment and development plans and is expecting an estimated $6.5 billion budget deficit this year. Reserves and potential loans are expected to help cover the shortfall. Oman has a higher number of locals employed in the private sector than other members of the GCC, and Muscat is keen to expand opportunities for private sector employment. The only member of the Gulf Cooperation Council to be located outside the Gulf, Oman has seen rising Gulf tourism as wealthy Khaleejis flock to the seasonal greenery associated with Monsoon rains.

Oman's strategic position is also attracting interest as a transshipment and oil-bunkering hub outside the energy-rich Persian Gulf and as a potential route to bypass Iranian interference in the Strait of Hormuz. Muscat will continue deficit spending, and even borrowing, to push these projects forward with an eye to maintaining domestic stability, especially in the event of the Sultan's passing. This does not mean that the sultanate has not pursued opportunities to cut spending. Indeed, previous attempts to reduce fuel and other commodity subsidies have been rebuked by the country's largely advisory parliament, but the government has made it clear that it is eyeing serious subsidy reform in the future. For now, Oman is likely to focus on taxing remittances and increasing costs and taxes on foreigners as Muscat tries to balance an impending leadership transition and a drop in oil prices.

Omani key economic indicators


The kingdom of Bahrain is made up of a group of small islands immediately off the eastern coast of Saudi Arabia. Bahrain is the smallest oil and gas producer in the Persian Gulf — the island exported less than 50 thousand barrels per day in 2013. The kingdom has had a close relationship with Saudi Arabia for years, especially as Bahrain's dwindling oil and natural gas reserves have left Manama economically dependent on its neighbors. Bahrain is joined to mainland Saudi Arabia via the King Fahd Causeway, and its Sitra refinery processes crude from the country's share of the Abu Safah offshore field. Bahrain's small oil and natural gas reserves have made the island a financial hub for the region and made it one of the most open markets in the Gulf. Manama has posted consecutive budget deficits since 2009, however, in sharp contrast to its GCC neighbors. It also has the highest fiscal break-even oil price in the bloc. Social spending has risen in order to discourage the public unrest present since the 2011 Arab Uprisings, through which Bahrain's majority Shiite population is pushing for greater recognition from and political integration with the Sunni ruling family.

Bahrain (and it small hydrocarbons sector) is not as directly impacted by falling oil prices as its neighbors, but rising economic pressure on its main economic patrons is of concern to Bahrain. Its position as a majority Shiite kingdom between Saudi Arabia and Iran and as a member of the GCC give Riyadh a reason to subsidize Bahrain, but Bahrain will continue to feel the economic pinch. In April, Moody's Investor Service downgraded its ratings for the country following news from the kingdom's modest sovereign wealth fund that it would not sell off assets to fund a budget deficit in the upcoming year. Bahrain will not be able to borrow internationally as cheaply as its neighbors, likely furthering its reliance on economic support from within the bloc.

Bahrain's leaders have made several attempts to adjust subsidy programs, including cuts in spending on fuel and on meat and other foods. As in much of the GCC, the bulk of the population is made up by expats, and rising numbers of foreigners are straining the government's already shrinking coffers. Bahrain has proposed cutting or eliminating subsidies and replacing them with cash payments to Bahraini citizens, pushing much of the cost of goods onto expatriates. The moves have yielded intense debates among parliamentarians, and Bahrain's reliance on expatriates and foreign companies to fuel its financial and banking industries make Manama wary of angering outsiders. But its precarious economic decision means that the island kingdom will likely serve as the GCC's laboratory of subsidy reduction mechanisms, and we look to Manama as leading its neighbors in abrogating decades of state spending on subsidies.

Bahraini key economic indicators

Changes for the Future

If there is any unifying principle linking the economic policies of the Gulf monarchies, it is the recognition of a need to address state spending, though timelines and commitment to change vary wildly. Change is more likely than not, however, even if oil prices recover. The three states that will likely lead the charge are Bahrain, Oman and Kuwait, the latter of which is ironically one of the most financially secure states in the region. In coming months and years we will be watching for a variety of methods employed by states, from subsidy cuts to tax increases on foreigners, as each capital strives to find solutions in line with their own unique concern.

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