Ample Reserves
The richer GCC countries were saving while they spent. Saudi Arabia, the Arab world’s biggest economy, has seen its net foreign assets jump 80 percent to $773 billion since 2009, according to central bank data. The U.A.E. and Qatar have two of the world’s largest sovereign wealth funds.
With those funds available, “my guess is that the Gulf states will just draw down resources” rather than “do anything really serious,” said Gregory Gause, head of the International Affairs Department at Texas A&M University.
Before having to tap their reserves, oil prices may rebound.
The oil market will recover with global economic growth, Saudi Arabia Oil Minister Ali Al-Naimi said in Abu Dhabi on Dec. 21. “Fossil fuel will remain the main source of energy for decades to come,” he said. Oil surged from a five-year low at the end of last week after Al-Naimi said the slump in prices was temporary.
In the meantime, there’s no guarantee that a spending strategy would work because the reserve cushion may not last long without economic adjustments, said Nasser Saidi, president of Nasser Saidi & Associates in Dubai and former chief economist of the Dubai International Financial Centre.
Fuel Subsidies
“Growing government spending has been eating into those surpluses,” he said. “You’re going to have to adjust to the lower oil prices. The implication is that you either have to start to reduce spending or you need new sources of revenue, or both.”
Persian Gulf monarchies maintain high fuel and power subsidies, which are used too transfer oil wealth to their citizens. Cutting them is politically sensitive after domestic discontent led to the overturning of governments in Tunisia, Libya and Egypt since 2011.
Gulf leaders say they’re aware of tougher times ahead. Saudi Finance Minister Ibrahim al-Assaf said this month that the kingdom will use its financial reserves as a “line of defense” against lower oil prices, and will keep funding “massive” development projects.
Oman, which lacks assets on that scale, is considering a freeze on public sector hiring, Finance Minister Darwish Al Balushi said last month.
Affecting Income
In Kuwait, which has seen a wave of peaceful protests since 2011, ruler Sheikh Sabah said on Dec. 9 that oil prices are reaching “levels that have started to affect the income and development programs of our countries.”
Economists have begun to cut growth estimates. While the Saudi economy was still forecast to grow 3.6 percent next year in the latest Bloomberg survey between Dec. 12 and Dec. 17, that was down from 4.2 percent three months earlier. The figure dropped to 4 percent from 4.5 percent for the U.A.E., and to 2.4 percent from 2.8 percent for Kuwait.
“The real questions though are over the longer term, about how the Gulf generates growth without being able to fall back on ever rising levels of public spending,” said Williams of HSBC.