OIL MONSTER SET TO SWALLOW GCC'S WEALTH IN 15 YEARS?

Most GCC currencies are pegged to the US dollar

Global oil demand is declining; energy efficiency is rising; carbon tax is on the horizon, technology has boosted oil production; the world is entering the age of oil abundance, as a result, the oil-rich Arabian Gulf region is facing the depletion of financial wealth in 15 years.

Let’s connect the dots with the help of the International Monetary Fund’s (IMF) research paper titled, “The Future of Oil and Fiscal Sustainability in the GCC Region”, released on February 6, 2020.

Six oil-rich countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates – that are a member of the Gulf Cooperation Council (GCC) are also responsible for the one-fifth (20%) of the global oil production.

The global oil market is undergoing a huge fundamental change as new technologies are increasing the supply of oil from old and new sources while raising concerns over the environment are seeing the world gradually moving away from oil, says the IMF report, adding that global oil demand is expected to peak in the next two decades and at the current fiscal stance, the GCC’s financial wealth could be depleted by 2034.

The GCC region’s aggregate net financial wealth, estimated at US$2 trillion at present, would turn negative by 2034 as the region becomes a net borrower, according to the IMF report.

“This timeline would be brought forward in the alternative scenarios of faster improvement in energy efficiency and the introduction of a carbon tax [beginning 2022]. Specific timing would vary across countries, reflecting differences in their initial conditions.

“For example, Bahrain and Oman are the most vulnerable to this downturn, while Kuwait’s large sovereign wealth fund will help keep its net financial wealth positive until about 2052,” it says.

A deceleration in hydrocarbon revenue growth would further add to the pressure on GCC’s wealth. The eventual decline in global oil demand peaking at 2040 could be much sooner in scenarios of a stronger regulatory push for environmental protection and faster improvements in energy efficiency, says the IMF report.

Meanwhile, the oil market has experienced a significant turnaround in recent years with the oil price decline of more than 50 percent during 2014-2015 – one of the largest in the past century. “It amounted to a transfer of nearly US$6.5 trillion from oil-exporting to oil-importing countries, in the form of cumulative oil revenue decline, between 2014 and 2018. Many oil-exporting countries are still adjusting to the effects of this oil price decline,” says the research paper.

Recognizing the need to accelerate efforts to reduce their dependence on oil, all GCC countries have adopted new (or modified existing) strategic “visions” for their economies envisaging faster diversification and private sector development. To this end, governments have begun to roll out wide-ranging structural and fiscal reforms. There has been a significant recalibration of fiscal policies, according to the IMF.

Most GCC countries have begun to improve their public financial management while also making efforts to strengthen their fiscal positions. The latter involved deploying a variety of quick fixes - such as short-term freezes and cuts in various discretionary items - as well as more substantive reforms, such as phasing out of inefficient energy and water subsidies and the introduction of new taxes and fees. The introduction of excise and value-added taxes in Bahrain, Saudi Arabia, and UAE was a significant change that other GCC countries are expected to follow.

As a result of these efforts, the average non-oil primary fiscal balance in the GCC has improved from a deficit of more than 60% of non-oil GDP in 2014 to 44% percent in 2018 - a remarkable effort in any international comparison, says the report.

However, more efforts are needed in the GCC to secure a sustainable post-oil future. “Ongoing reforms are moving the region in the right direction, but they need to accelerate. Even with rapid diversification, a sizable fiscal adjustment will be needed in the long term,” says IMF, adding that achieving this adjustment will require countries to step up their efforts to raise non-oil fiscal revenue, reduce government expenditure, and prioritize financial saving.

The economic well-being of future generations would be helped by a strong early start with these reforms, although they will entail greater effort by the current generation.

According to the IMF, the biggest challenge will be managing the broader economic transition. The long-term future of oil would have a multitude of socioeconomic consequences affecting employment, household incomes, and business confidence and investment. “More work is needed to fully understand these consequences, design mitigation strategies, and build the social consensus required for their implementation.”