Gulf countries seen as well-positioned to weather storm

DUBAI - Oil prices remain under pressure but have begun to steady after US crude oil contracts for delivery next month slipped into negative prices for the first time in history. Storage capacity has been filling up around the world as excess supply and weak demand keep oil markets mired in uncertainty.

More serious warnings are also being sounded about the economic impact from COVID-19 as the International Monetary Fund (IMF) says the fallout is likely to be worse than earlier estimates. The economic downturn triggered by COVID-19 was already expected to overshadow the 2008 global financial crisis but it is now feared a bigger recession than the Great Depression of 1930s could lie ahead.

Arab Gulf states have been at the frontline of the economic impact of the pandemic as they make up the world’s most important oil-exporting region but also as some of the fastest-growing emerging market economies.

In unprecedented moves, Islam’s two holiest sites have been closed to pilgrims in Saudi Arabia until further notice as have global business and leisure tourism hubs elsewhere such as Dubai, Abu Dhabi and the wadis of Oman. Arab Gulf airline fleets, among the world’s largest, are grounded and shopping malls, hotels and restaurants remain shuttered.

As it does for the rest of the world, COVID-19 represents an unexpected, strategic challenge for Arab Gulf states but experts say the region as a whole remains better positioned to navigate the downturn than other regions, owing to prudent fiscal planning and risk management policies in recent years. Ahmed Esam, a researcher at Oxford Economics, a forecasting and quantitative analysis provider, assesses that Arab Gulf states, “the most resilient in the Middle East and North Africa,” have enough financial firepower to meet the challenge from Covid-19.

Consider the banking sector in the Arab Gulf, for example, which has ranked among the world’s most profitable in recent years according to S&P Global Ratings. With combined assets of more than $1.5 trillion, the sector has built up sufficient provisions and buffers for emergency scenarios such as the current one to absorb a shock of up to $36 billion.

Central banks around the Arab Gulf moved quickly and decisively with large support packages to ensure liquidity and capital reserves for banks. Relief measures for lenders as well as corporate and private borrowers demonstrated a focus on preservation and maintaining positive indicators rather than averting any notion of a financial meltdown.

With crude oil prices having sunk below $30 a barrel, all Arab Gulf states will record budget deficits this year and possibly next — the extent of which will be dependent on how and when the COVID-19 outbreak is finally overcome at a global level.

Projected spending gaps are already being plugged as Saudi Arabia, the United Arab Emirates, Kuwait and Qatar all make use of the strength of their sovereign credit ratings. Just this month Saudi Arabia, the UAE, Kuwait and Qatar raised a combined $24 billion through bonds — accounting for more than half of the amount raised by governments across emerging markets.

Abu Dhabi raised $7 billion from bond sales which were more than six times oversubscribed, with 90% of its order book comprised of international investors.

Such levels of investor demand demonstrate a strong appetite for financing governments with low direct debt levels and attractive debt profiles possessed by many Arab Gulf states.

Riyadh is now gearing up to take on its biggest external financing programme after its government raised the national debt ceiling from 30% to 50% of gross domestic product (GDP) last month. A debt ceiling of 50% of GDP is still one of the world’s lowest but will help Saudi Arabia absorb the budgetary shock triggered by the COVID-19 pandemic, which comes in the midst of its Vision 2030 development programme.

Contrasted against the scale of deficits and borrowing being done by the governments of the US and UK, the world’s two most indebted nations, for example, the resource-rich Arab Gulf largely fares well. The UK budget deficit is expected to triple to $210 billion this year. In the US, where total jobless claims have risen to 26.4 million, the budget deficit for this year could increase to a fifth of GDP.

Oman and Bahrain face comparatively more acute challenges to cover expenditure shortfalls — challenges that are far from insurmountable — but the Arab Gulf region overall has the robustness and policy enforcement capacity to weather this economic storm.

The current economic scenario even provides a backdrop to streamline and accelerate ongoing economic transformation programmes which aim to remove inefficient expenditures and unlock long-term growth for and by the non-oil sectors by harnessing digital innovation, new technologies and local talent more effectively.

On the upside for the Arab Gulf, its host of sovereign wealth funds (SWFs) — which have grown to more than $2 trillion in recent years — are “mobilising” to acquire assets at knock-down prices, according to the Financial Times.

Investment opportunities are opening up across different asset classes including in firms where business fundamentals remain solid and which are likely to bounce back strongly when a global economic recovery begins.

COVID-19 is sure to create large numbers of distressed assets around the world which will need rescue investors such as Abu Dhabi Investment Authority, Saudi Arabia’s Public Investment Fund or Investment Corporation of Dubai to buy assets or subscribe for rights issues.

Those purchases are likely to be in addition to new funds that will probably be created specifically for distressed asset investments that Arab Gulf sovereigns, quasi-government and private corporations are all likely to become widely involved in.