Oil boom is over for GCC
A decade ago, one could not fathom an oil boom going bust. Sure, it was inevitable that one day oil would lose its value, but that was supposed to be decades away.
A lot has happened since then.
As we approach the end of March in 2016, the indicators of the economy are all the opposite of what was prevailing in 2006.
Here are some pertinent points to consider:
- US Crude Oil is hovering at around US$ 40 per barrel.
- It crossed US $140 per barrel in July 2008 and till May 2014 was over US $100 per barrel.
- Massive expansion plans were put into play when oil was hovering at about US $70 per barrel about a decade ago.
- Over the last three years, prices have fallen approximately 50%, that means for most Gulf Countries, income is down considerably. In Nigeria (an oil producing country), oil revenue is down over 70%
- The Saudi government is facing a serious financial crunch because of lost oil revenue. Many projects have been put on hold. Fiscal belt-tightening has been enforced (a phenomenon unknown in the Middle East) — Update, my good friend Jawwad Farid told me Saudi Arabia is already in a US$ 100 Billion deficit.
- Reserves are falling fast.
- Over US $100 billion flow out of the GCC in the form of remittances.
- Taxes are being proposed on these remittances as well as VAT within the GCC.
- Construction projects in both UAE, Kuwait, Qatar and Saudi Arabia have been hampered due to budget cuts.
- In Saudi Arabia the country’s construction situation is starting to face a cascade effect after the House of Saud stopped payments to the Saudi Binladen Group. Open street protests by unpaid laborers have been witnessed on many occasions.
- A credit crunch has left many construction companies edging towards bankruptcy.
- With Iran now in the playing field to pump more oil after the sanctions have been lifted, expect oil prices to remain low.
- An oil glut of almost 2 billion barrels remains in the market. The glut is being bartered with emerging economies (though no one would like to admit it).
- Despite the record demand, the over-supply (oil glut) and production capacity, oil prices are forecasted to remain low for the next two years at least.
- Divided camps have risen up within the House of Saud, as to how the country should be governed. Expect that to play a significant role in how the Saudi government reacts to hard fiscal times, with their limited reserves and an ever growing economy and population that is literally a ticking time-bomb.
- GCC based sovereign funds, one of the largest in the world, have been pulling money from where they can without upsetting prices so as not to further devalue the funds in which they have invested.
- Because of high-unemployment, the Saudi government is resisting all attempts to lift subsidies on oil, which in turn is making the reserves go down faster.
All this will have a direct bearing on the millions of workers in the Middle East. From Africa, to South Asia to Far East, blue collar workers would be first in the culling line.
Reverse Tide: Foreign Workers from Gulf Countries to start exiting soon
Remittances from these workers are all but guaranteed to decline.
Naysayers point fingers at the figures which show a rise in remittances from GCC, discarding any possibility of a looming threat.
Pragmatic economists side with caution. They say unless the gulf economies can somehow miraculously turn around their economies from carbon-based to, say, manufacturing or tourism, the problem will remain. It is only a matter of time before the reserves run low (or out).
One of the first casualties in any downward sector is the building and construction sector. This would be true for more of the GCC, where hundreds of empty construction projects are now fast becoming a reality. Liquidity is an issue for many construction companies who are seeing the government introduce delays in releasing payments. Others are seeing access to credit (financing) diminish midway for their commercial projects.
Thousands of construction workers are already behind pay (in some cases up to four months). Chances are they might never see their pay again. Most of them would be deported and this is most likely going to start a wave of temporary immigrant workers who will go back home – with nothing.
The host countries and their citizens see these temporary workers as leechers on their economy, which is ironic, as the entire GCC was built by these very workers and they take menial and labor intensive jobs that their host citizens refuse to take.
Countries from where these laborers originate depend on these foreign workers remittances to keep their economies alive. Think of remittances as the much needed miracle bailouts that keep these countries afloat, without them, the current deficit would soar, as well as the unemployment, etc.
National programs within the GCC to employ more locals poise to reverse the dependence on foreign workers. The programs have been questionable in the hey days of oil above $100, but today, the blueprints of such nationalism are being revisited.
Short-term oil gains, new projects being announced or rise in remittance outflows does not mean all is well. These instances are just that – short term.
The medium to long term view on the GCC is not a positive one and in the next 2-3 years the economic effects of a reverse tide would clearly be seen by all: GCC and the countries that export manpower.
This page was last updated on March 25, 2016.