Oil Crash Is Over But Debt Is Still Growing in Gulf
(Bloomberg) -- The oil crash came and went but the debt pile it left across the Gulf is still growing, leaving the region’s energy-dependent economies more vulnerable next time a crisis strikes.
All but debt-free before crude prices nosedived in 2014, many Gulf governments tried to borrow their way through while making only cautious and halting efforts to cut spending and diversify their economies. Meanwhile, a Saudi-led blockade of Qatar has split the six-state Gulf Cooperation Council and complex regional dynamics mean it’s no longer a foregone conclusion that the strong will bail out the weak with no strings attached.
If oil prices crash again, the pain could be greater than five years ago, raising the risk of a regional recession because governments would have to slash spending while markets would be more reluctant to lend, according to Bloomberg economist Ziad Daoud.
“Gulf economies are more vulnerable to a collapse in oil prices today than during the last rout in 2014,” Daoud said. “Debt is higher, foreign exchange reserves are lower and the chance of pooling resources is smaller. A sharp drop in oil prices could prove more damaging this time around.”
Moment of Truth
The worst oil crash in a generation was a moment of truth for energy juggernauts around the Gulf, which include the world’s biggest exporters of crude and liquefied natural gas.
After splashing petro-wealth on generous state handouts during more than a decade of surging oil prices, Gulf governments, suddenly cash-strapped, spent the past few years carefully trimming benefits to citizens and cutting subsidies while trying to avoid a popular backlash.
Saudi Arabia and the United Arab Emirates have imposed excise and value-added taxes for the first time. But the prospect of slimming bloated wage bills is fraught with political peril, and they remain the biggest-ticket item on Gulf budgets.
While Oman and Bahrain stand out, the experience of the bloc’s two smallest economies might be less an exception than a warning for what could lie ahead if governments don’t diversify -- and fast.
In 2018, the GCC accounted for nearly a quarter of emerging-market bonds sold in dollars and euros, up from less than 2 percent a decade ago, according to data compiled by Bloomberg. As a whole, Gulf economies have almost tripled the ratio of debt to gross domestic product since 2014.
“It will become dangerous for market participants if the debt spiral gets out of control, especially coupled with a collapse in oil prices” and local risks such as questions of political succession, said Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt. “Economic diversification is poor, and it will take lots of time to tackle it.”
Most Vulnerable
The picture is uneven across the bloc, with Qatar and Kuwait protected by large financial buffers. The U.A.E. is also strong. But in Oman and Bahrain, which were slow to implement fiscal reforms despite dwindling energy reserves, the future looks more uncertain.
Bloomberg Economics found that Oman and Bahrain “already have unsustainable debt dynamics,” while the outlook is mixed for Saudi Arabia. The kingdom could reach its self-imposed debt ceiling of 30 percent of GDP by 2020 if large budget deficits persist and it doesn’t tap into reserves, down a third since mid-2014.
Oman’s budget deficit is among the largest of all sovereigns tracked by Fitch Ratings, which downgraded its debt to junk in December. Concerns over Oman’s dwindling buffers have also sparked a debate over whether it’ll need a bailout like that Bahrain got last year.
“The critical issue is the success in diversifying the economies from the debt-funded spending,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Without that, economic fundamentals will weaken with the higher leverage.”
12
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Gunvor CEO Sees Russian Refining Capacity Taking Hit from Drone Strikes
- These Factors Helped Brent Oil Price Break Above $85
- Sinopec Engineering Posts Higher Annual Petrochemicals Revenue
- Imperial Pipeline in Winnipeg Goes Offline for Three Months
- Gaz System to Acquire Gas Storage Poland
- Subsea7 Secures Contract to Service Woodside's Trion
- Adnoc Inks Supply Deal for Ruwais LNG Project with Germany's SEFE
- TotalEnergies to Acquire TLCS Eyeing Bayou Bend CCS Project
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Rystad Looks at the Buzz Around White Hydrogen
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension