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June 8, 2020

MIDDLE EAST: Arab Gulf states adjusting to post-Covid-19 world

BY Jon B. Alterman

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( 7 mins)
  • Arab Gulf states have been hit by the combination of low global oil prices and lockdowns.
  • The resulting crisis has prompted calls to rethink the centrality of large expatriate worker populations for economies.

The Arab Gulf states were hit doubly by the Covid-19 crisis. Severe lockdowns – often enforced by police – kept most people indoors for weeks, and the plunge in global oil demand tanked prices. Two decades of historically high oil prices gave governments buffers to work from, but the long-term picture in the region looks significantly darker than it was at the beginning of the year.

While oil prices have recovered from their lows earlier in the spring, Gulf governments had based their budgets on significantly higher oil prices this year than they are able to obtain now. Saudi Arabia, for example, thought it was being conservative when it based its 2020 budget on USD 60/bbl oil. The current trading price for Arabian Light, the leading Saudi grade, is just over half that amount. Governments are still making money – the cost to lift a barrel of oil in Saudi Arabia is still the lowest in the world, about USD 10 – but the spread between the cost of producing oil and the sales price had allowed a pattern that amounted to negative taxation, whereby the government financially supported the population rather than the opposite.

Even as the global economy recovers, oil prices are likely to recover more slowly. In part, this is because some of the hundreds of millions of barrels of oil that went into storage when demand slackened in the spring are now coming out of storage, increasing supply. In addition, low prices pushed many US tight oil producers to cut production, but with oil prices rising, some tight oil will become economical again and production will begin to return. Many of the Gulf Cooperation Council states have fiscal break-even prices for oil in the range of USD 80. Not only are those numbers unattainable this year; they may not ever again be realized.

Saudi foreign reserves, which have often hovered about USD 500bn, dropped about 5% in both March and April, partly due to an effort to pursue higher-yielding investments than the treasury bills that make up the bulk of holdings. Talk has begun once again of abandoning the dollar peg for local currencies, which Kuwait did in 2007, although it remains unlikely in the near term.

For Gulf governments, all of which derive the bulk of their revenue from oil, the sharp drop in prices and their likely slow recovery ends almost two decades of prosperity that began after the 2003 Iraq war. Ambitious regional plans, such as Saudi Vision 2030 and Abu Dhabi’s Economic Vision 2030 understood that oil’s central role in the economy was unsustainable in the long term. Governments were counting, however, on a gradual transition, with ample time and money available to fund it. Sustained lower oil prices will make the need for these plans more apparent to their publics, but the pain associated with their implementation is likely to be higher than previously anticipated.

Domestically, lockdowns in the Gulf are easing. Saudi Arabia announced that it will be “back to normal” on 21 June, and the UAE has been reducing the hours of its curfew. Even as societies open up, though, the impacts of three months of shutdown on the Gulf’s private sector are profound. Hospitality, retail, restaurants and travel are all deeply affected by ongoing restrictions, and they may take years to recover. The luxury airlines that both brought global destinations in easy reach of Gulf citizens and brought millions of travelers to the Gulf every year, will hemorrhage money for years to come. The direct economic effects of business disruptions on most citizens is diminished because 80% of nationals in the workforce in most Gulf states are government employees, and they continue to receive their salaries. Yet, laws that require foreign businesses to have local partners mean that constricting local economies affect Gulf citizens even if they don’t employ many of them, and local investors – both businesspeople and landlords – are being hurt. In Saudi Arabia and the UAE, governments are focused on sustaining the liquidity of the banking system, in order to protect those investors.

Even so, storm clouds are looming. Invigorating local economies and pushing citizens toward employment in them were central tenets of many countries’ reform programs. Doing so will be even harder in the post-Covid world, because the private sector will seem even more precarious.

In the near term, the biggest crunch due to Covid-19 in the Gulf may be among expatriate workers. Expatriates represent about one in three people living in Saudi Arabia, and as many as nine out of ten in the UAE. Large as these numbers seem, foreigners represent even larger fractions of the private sector workforce (since their numbers are unalloyed with either elderly parents or children, and since so many Gulf Arabs work for the government). For decades, the Gulf has benefited from having this high-productivity, low-wage workforce supporting a low-productivity, high-wage workforce. Entire sectors of the economy are comprised entirely of foreign workers. The largest numbers come from South and Southeast Asia, but a significant number are Arabs, with smaller numbers of Europeans, Americans and East Asians.

The low-wage workers in the Gulf, largely from South and Southeast Asia, has been especially hard-hit by Covid infections. Qataris, for example, represented 6% of cases in Qatar in April, while 32% of cases were Indians. That same month, Saudi nationals represented less than a third of cases in the Kingdom despite representing more than two-thirds of the population.

Asian workers in the Gulf often live in crowded conditions, which helps explain their higher infection rates. Yet, they provide most of the personal services Gulf Arabs enjoy, from helping raise their children to their manicures to serving meals in restaurants, and they do virtually all of the construction work that has transformed Gulf cities into gleaming metropolises.

Gulf leaders are starting to see these populations not only as a disease vector, but also as an increasingly unaffordable luxury. The Kuwaiti Prime Minister told newspaper editors last week that the country needed to lower the fraction of expatriates in the population from two in three to one in three. The sharply lower population would raise the cost of labor, drop real estate values, cut economic activity as populations shrink, and force Kuwaitis into lines of work that few have been willing to consider. Saudi Arabia has already embarked on this path, and more than 2 million foreign workers have left since 2017. A recent report by Oxford Economics predicted that diminished employment opportunities could drop the population 10% in counties such as the UAE and Qatar.

For the Gulf, the Covid-19 crisis likely represents an inflection point, marking the dawn of a less-prosperous future that all had expected. While regional governments still have deep pockets and retain the confidence of their populations, increased talk about “sustainable” development models will bring more scrutiny to expenditures and force changes in the labor market that many leaders believe are long overdue. The first period of prosperity in the Gulf, after the 1973 oil price shock, brought education and electricity to millions who had never had either. The second period of prosperity, after the 2003 Iraq war, built gleaming cities as the region embraced globalization. As globalization faces its own reckoning, the region will struggle to define its new normal, and it will be premised on the idea that the age of oil booms has passed.

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