Analysis: Gulf countries exposed to dual shocks

Wednesday, 2020-05-27 12:22:31
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FILE PHOTO: An oil tanker is being loaded at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia, May 21, 2018. (Reuters)
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NDO – The economy in Gulf countries has been tottering and facing heavy financial pressure since being hit by two “big waves”, triggered by the COVID-19 pandemic and a record plunge in oil prices.

Iraq’s new finance minister, Ali Allawi, recently arrived in Saudi Arabia to seek emergency assistance to curb the crisis in the context that this oil powerhouse is also struggling to overcome difficulties.

During his first trip abroad as the head of the Iraqi finance industry, Allawi prioritised seeking additional funds to offset the budget deficit. In addition to Saudi Arabia, Iraq also “knocked on the door” of Kuwait and the United Arab Emirates (UAE) in search of financial support. The sharply falling oil prices have put Iraq in the face of a liquidity crisis, raising concerns about the ability to pay salaries for about four million civil servants, as well as pensions and social welfare funds for about four million people in the country. The Iraqi government planned to spend nearly US$4 billion a month to pay civil servants’ salaries in 2020, but its budget revenue only stood at US$1.4 billion in April due to a plunge in oil prices, with this being the only source of revenue to cover Iraq’s official budget expenditures.

Iraq’s new Prime Minister Mustafa al-Kadhimi took office in the context of the country facing mounting difficulties, as the economy has fallen into recession and the quality of people’s lives has been increasingly deteriorating, which have ignited a wave of protests over the past few months. The COVID-19 pandemic has profoundly affected and exacerbated Iraq’s economic burden and social problems. The oil price shock has caused a severe decline in Iraq’s revenue, from US$6 billion in February to US$1.4 billion in April, less than a fifth of the revenue in the same period last year. This has pushed Iraq to the brink of financial collapse, as it inherently relies on oil revenues to cover more than 90% of government spending.

As the largest producer in the Organisation of the Petroleum Exporting Countries (OPEC), Saudi Arabia has also inevitably been affected by falling oil prices. To prevent the collapse of the oil market, OPEC member states and partners (OPEC+) have agreed to reduce production by 9.7 million barrels a day in May and June. Many OPEC countries have agreed on deep cuts in their crude oil production to support oil prices. Saudi Arabia said it would reduce production by an additional one million barrels a day in June, equivalent to 1% of global oil supply, thereby bringing its production to 7.5 million barrels a day. The sharp fall in oil prices has caused a 25% shrinkage in Q1 profit for Saudi’s national oil company Saudi Aramco. The group’s net profit in the January-April period decreased by approximately US$16.66 billion. Saudi Aramco said it would reduce spending from US$32.8 billion in 2019 to about US$25-30 billion this year. The company is now striving to adapt to the constantly changing and extremely complicated business environment. Since the beginning of 2020, Saudi Aramco has lost 12% of its stock value.

Saudi Arabia is under financial pressure from falling oil prices, while anti-pandemic measures are likely to affect the speed and scale of economic reform in the “oil kingdom”. Although the Saudi Minister of Finance insisted that the country’s economy remains solid and is capable of coping with the crisis caused by COVID-19, the “oil giant” was still unable to avoid having to implement austerity measures and reduce its spending. According to the International Monetary Fund (IMF), the Saudi economy is forecast to fall by 2.3% this year compared to the growth of 0.3% in 2019. Saudi’s foreign exchange reserves in March fell at the fastest pace in 20 years, while its budget deficit was reported at US$9 billion in the first quarter of 2020.

To reduce burden on the budget, Iraq is planning to sharply reduce social benefits, and Saudi Arabia will have to suspend its large and ambitious projects. The dual shocks from falling oil prices and the COVID-19 pandemic are placing great pressure on many countries, especially on economies in the Gulf and the Middle East.