The Arab world is vulnerable
The Arab world is facing a global coronavirus recession and the associated oil demand shock. On April 22, the Arab Center Washington DC hosted a panel discussion on “The Oil Market and the Economic Impact of COVID-19 in the Arab World.” The discussion featured three speakers:
Garbis Iradian: Chief Economist for Middle East and North Africa, Institute of International Finance
Bessma Momani: Interim Assistant Vice-President of International Relations and Professor of Political Science, University of Waterloo
Khalil E. Jahshan: Executive Director, Arab Center Washington DC, moderated
The oil market and Arab states
Iradian stated that Russia and Saudi Arabia have reached an agreement to cut crude oil production by 9.7 million barrels, but this agreement will not be enacted until May. West Texas Intermediate has crashed into negative territory. More than sufficient oil supply and limited storage capacity is causing oil companies to give out oil for free. Iradian expected oil prices for the second quarter of this year to bottom around $30. The prices for the second half of this year will depend on recovery of global economy, especially from the COVID-19 pandemic. But prices will remain low in the long-term.
Iradian mentioned that Saudi Arabia, the UAE, and Kuwait could cope with low oil prices for at least 2-3 years because their ratio of public debt to GDP is modest. These countries have large financial buffers, including official reserves and sovereign wealth funds that can finance their current deficits.
Algeria, Oman, Bahrain, and Iraq, however, are encountering greater risks. Oman’s and Bahrain’s ratio of public debt to their GDP is high. Neither has sufficient official reserves and sovereign wealth funds, so they are cutting spending and diversifying their economies. Low oil prices will create more incentives for some oil exporters to reform. Both Algeria and Iraq have provided stimulus packages to lend to SMEs at concessional terms.
Oil importers, such as Egypt, Morocco, Tunisia, Jordan, Lebanon, and Sudan could benefit a little from low oil prices. The economic contraction, however, will have a negative impact on them due to the decrease in tourism, remittances from the GCC, and investment.
A grim outlook
Momani is pessimistic about the current global liquidity crisis. The Middle East depends on multilateral organizations and official development assistance from the West. The West, however, doesn’t have the incentive to give financial resources to the Middle East. Although the Arab states have reserves, they will slowly dry up because the global economy will not recover in the short-term.
Momani believes that this is a semi-permanent situation that will induce restructuring in every sector. The decline in oil prices is problematic to many Arab states as they are dependent on oil exports. In Iraq, the cost production of crude oil is $5/barrel, and in Saudi Arabia the cost production is $10-15/ barrel. If low oil prices persist, it will lead to revenue shortfalls. Some Gulf states intend to diversify their economies, but tourism, airlines, and big sports events are all at a standstill.
Momani listed several more economic challenges that the Gulf faces:
- Most states without enormous reserves have low tax bases.
- The lack of social safety net means public health services are inequitably distributed between the rich and the masses.
- Guest workers in the Gulf face both unemployment and discrimination.
- The intergenerational family structure prevents Middle Eastern families from combating COVID-19 effectively.
- Universities in the Gulf, most of which are subsidized by Gulf states, are facing difficulties.
- The UAE, which depends on port infrastructure, will come to a standstill as the movement of goods and services between China and the Middle East halts.
- Oil exporters depend on US dollars but cannot print them, they are hostage to the US Federal Reserve and the Trump administration.
- The crisis could induce the collapse of small entrepreneurial sectors.
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