GCC in times of cheap oil: an opportunity for economic reform and diversification Kevin Körner & Oliver Masetti GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215
GCC in times of cheap oil: an opportunity for economic reform and diversification The Gulf monarchies are strongly dependent on oil exports to cover fiscal and external expenditures and produce economic growth. This makes the economies highly sensitive to the substantial decline in oil prices since summer 214. Budget breakeven oil prices for all GCC countries except Kuwait and Qatar now lie above current spot prices, translating into fiscal deficits if current prices prevail in 215. However, major Gulf oil producers such as Saudi Arabia and the UAE are well prepared to withstand a period of cheap oil given their vast financial wealth in form of FX reserves and SWFs as well as easy access to financial markets. This should allow them to maintain public investment and keep economic growth in positive territory. In the medium-term, continuously cheap oil would put growing pressure on GCC governments to reform public finances both on the expenditure side (e.g. cut subsidies, public payroll) and on the revenue side (increase share of non-oil revenues, raise taxes). At the same time, this also provides an opportunity to speed up long overdue structural economic reforms in order to reduce overall hydrocarbon dependence. GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 1
Saudi Arabia has by far the largest population within the GCC... Population of the GCC m, 214 3 25 Kuwait Bahrain Qatar United Arab Emirates 2 15 Saudi Arabia Oman 1 5 Saudi Arabia UAE Kuwait Oman Qatar Bahrain Source: IMF Comparison to Germany: 81.1 m GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 2
... as well as the largest economy Nominal GDP of the GCC bn USD, 214 8 7 6 Saudi Arabia Kuwait Bahrain Qatar United Arab Emirates Oman 5 4 3 2 1 Saudi Arabia UAE Qatar Kuwait Oman Bahrain Source: IMF Comparison to Germany: 3,86 bn USD GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 3
But GDP per capita is highest in Qatar GDP per capita of the GCC USD, 214 1, 9, 8, 7, Saudi Arabia Kuwait Bahrain Qatar United Arab Emirates Oman 6, 5, 4, 3, 2, 1, Qatar Kuwait UAE Oman Saudi Arabia Source: IMF Comparison to Germany: 47,59 USD GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 4
Demography and immigration add to socioeconomic challenges Massive immigration leading to... Expatriates 1 1...rapid population growth Total population growth, % (2-214, cumulative) 3 8 8 25 6 6 2 4 2 4 2 15 1 5 Qatar UAE Bahrain Kuwait Oman Saudi Arabia % of total population, left side m, right side See (213): MENA 11 - The Basics Sources: National authorities, Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 5
Oil wealth of the GCC Amongst the world's top producers*... mbd, 213 USA Saudi Arabia Russia China Canada UAE Iran Iraq Mexico Kuwait 2 4 6 8 1 12 14 Source: U.S. Energy Information Administration (EIA)... and exporters of oil mbd, 213 Saudi Arabia Russia UAE Kuwait Iraq Nigeria Venezuela Qatar Angola Canada 2 4 6 8 1 Source: U.S. Energy Information Administration (EIA) *: Total oil supply, including crude oil, NPGL, refinery processing gain, and other liquids GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 6
Oil wealth of the GCC Decades of oil reserves for major GCC producers, less so for Bahrain and Oman Thousand barrels per day Bn barrels 14, 12, 1, 8, 6, 4, 2, 5.6 77.9 11.3 Bahrain United Arab Emirates Kuwait 62.7 Saudi Arabia 15.9 Oman 33.6 Qatar** 3 25 2 15 1 5 Current production, left side Reserves, right side Oil horizon in years* Sources: EIA, *: Oil horizon is the number of years for which oil production can be maintained at current levels, relative to confirmed reserves **: Qatar s hydrocarbon reserves mainly consist of gas, which is estimated to last for another 161 years at current production (212 data) GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 7
Underdiversified economies dominated by oil industry GDP by economic activity (211) % of GDP, 211 1% 8% 6% 4% 2% % Kuwait Qatar Saudi Arabia Oman UAE Bahrain Mining and Quarrying Public Services Transport, Storage, Communication Housing Other Manufacturing Trade, Hotels, Restaurants Construction Finance, Insurance, Banks Sources: Arab Monetary Fund, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 8
Strong trade integration, high exposure to world markets GCC amongst the most open economies in the world % of GDP, 213 14 12 1 8 6 4 2 Exports, goods Exports, services Imports, goods Imports, services Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 9
GCC economies defined by dependency on fossil fuels Fossil fuels/exports % 1 9 8 7 6 5 4 3 2 1 1996 1998 2 22 24 26 28 21 212 214 Bahrain UAE Kuwait Oman Qatar Saudi Arabia Sources: IIF, Fossil fuels/fiscal revenues % 1 9 8 7 6 5 4 3 2 1 1996 1998 2 22 24 26 28 21 212 214 Bahrain UAE Kuwait Oman Qatar Saudi Arabia Sources: IIF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 1
GCC economies defined by dependency on fossil fuels Fossil fuels/gdp (nominal) % 1 9 8 7 6 5 4 3 2 1 1996 1998 2 22 24 26 28 21 212 214 Bahrain UAE Kuwait Oman Qatar Saudi Arabia Sources: IIF, Fossil fuels/gdp (real) % 1 9 8 7 6 5 4 3 2 1 1996 1998 2 22 24 26 28 21 212 214 Bahrain UAE Kuwait Oman Qatar Saudi Arabia Sources: IIF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 11
Shift in global supply/demand over the last decade US takes over as world's biggest oil producer,... Oil supply, mbd 4 35 3 25 2 15 1 5 1994 1996 1998 2 22 24 26 28 21 212 214 US OPEC Saudi Arabia Russia Sources: EIA,... and dramatically reduces imports Oil imports, net (supply-consumption), mbd 14 12 1 8 6 4 2 1994 1996 1998 2 22 24 26 28 21 212 214 China United States India EU-27 Sources: EIA, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 12
Drop in oil prices substantially affects nominal GDP in the Gulf monarchies... Gross domestic product, nominal % yoy (left) 5 4 3 2 1-1 -2-3 27 28 29 21 211 212 213 214 215 216 12 11 1 9 8 7 6 5 4 Brent (USD/bbl, right) Kuwait Oman Qatar Saudi Arabia UAE Bahrain Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 13
... but not so much real GDP Gross domestic product, real (adjusted for price changes) % yoy (left) 2 15 1 5-5 -1 27 28 29 21 211 212 213 214 215 216 12 11 1 9 8 7 6 5 4 Brent (USD/bbl, right) Kuwait Oman Qatar Saudi Arabia UAE Bahrain Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 14
Low oil prices translate into: further shift to non-oil growth Saudi Arabia Real GDP, % yoy 1 UAE Real GDP, % yoy 1 Kuwait Real GDP, % yoy 2 8 6 4 2 8 6 4 2-2 15 1 5-2 Total 5-7 8-1 11-13 14-16 Non-hydrocarbon Hydrocarbon Sources: Haver Analytics, IMF, national authorities, -4 5-7 8-1 11-13 14-16 Total Hydrocarbon Non-hydrocarbon Sources: Haver Analytics, IMF, national authorities, -5 Total 5-7 8-1 11-13 14-16 Hydrocarbon Non-hydrocarbon Sources: Haver Analytics, IMF, national authorities, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 15
Low oil prices translate into: further shift to non-oil growth Qatar Real GDP, % yoy 3 25 2 15 1 5 5-7 8-1 11-13 14-16 Total Hydrocarbon Non-hydrocarbon Sources: Haver Analytics, IMF, national authorities, Oman Real GDP, % yoy 14 12 1 8 6 4 2-2 -4 5-7 8-1 11-13 14-16 Total Hydrocarbon Non-hydrocarbon Sources: Haver Analytics, IMF, national authorities, Bahrain Real GDP, % yoy 12 1 8 6 4 2-2 5-7 8-1 11-13 14-16 Total Hydrocarbon Non-hydrocarbon Sources: Haver Analytics, IMF, national authorities, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 16
Low oil prices translate into: fiscal deficits in most GCC countries, except Kuwait/Qatar Budget breakeven oil prices USD/bbl 215F Bahrain S. Arabia Oman UAE Qatar 214 Fiscal sensitivity to oil prices 215 fiscal balance, % GDP 3 2 1-1 -2 Kuwait 2 4 6 8 1 12 14 215f 214e Source: -3 BHR KWT OMN QAT SAU UAE 45 (Brent, USD/bbl) 6 (Brent, USD/bbl) 75 (Brent, USD/bbl) 9 (Brent, USD/bbl) Source: For more details see (May, 215): Special Report - Adjusting to lower oil prices: budget breakeven thresholds GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 17
Low oil prices translate into: fiscal deficits in most GCC countries, except Kuwait/Qatar Fiscal balance % of GDP 2 15 1 5-5 -1-15 -2 GCC 43,26 25 21 215F Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 18
Low oil prices translate into: current account deficits/substantially reduced surpluses C/A breakeven oil prices USD/bbl 215F 214 Bahrain S. Arabia Oman UAE Qatar External sensitivity to oil prices 215 current account, % GDP 3 2 1-1 -2 Kuwait 2 4 6 8 1 12 215f 214e Source: -3 BHR KWT OMN QAT SAU UAE 45 (Brent, USD/bbl) 6 (Brent, USD/bbl) 75 (Brent, USD/bbl) 9 (Brent, USD/bbl) Source: For more details see (May, 215): Special Report - Adjusting to lower oil prices: budget breakeven thresholds GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 19
Low oil prices translate into: current account deficits/substantially reduced surpluses Current account % of GDP 3 25 2 15 1 5-5 -1-15 -2 GCC 37,32 25 21 215F Sources: IMF, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 2
Vast government wealth mitigates impact of low oil prices Comfortable net external creditor position % of GDP, 214 3 25 2 15 1 5-5 -1-15 Kuwait Saudi Arabia UAE Qatar Oman Bahrain GCC SWFs amongst world's Top 2 bn USD 1 9 8 7 6 5 4 3 2 1 foreign assets external debt (-) net foreign assets Sources: IIF, Sources: SWF Institute, GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 21
High creditworthiness mitigates impact of low oil prices S&P Moody s Fitch Germany AAA Aaa AAA USA AA+ Aaa AAA Abu Dhabi AA Aa2 AA Qatar AA Aa2 AA Kuwait AA Aa2 AA S. Arabia AA- Aa3 AA Israel A+ A1 A Oman A- A1 NR Kazakhstan BBB Baa2 BBB+ Colombia BBB Baa2 BBB Bahrain BBB- Baa3 BBB Russia BB+ Ba1 BBB- Nigeria B+ Ba3 BB- CDS spreads for 5-year government bonds bps (June 1 st, 215) Germany USA Abu Dhabi Saudi Arabia Israel Qatar Italy Colombia Dubai Kazakhstan Bahrain Russia Nigeria Source: Bloomberg 1 2 3 4 5 GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 22
Fixed exchange regimes prove stable against drop in oil Saudi Arabia 3.8 3.75 3.7 3.65 3.6 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg USD/SAR USD/SAR 12M Forward Qatar 3.75 3.7 3.65 3.6 3.55 3.5 3.45 3.4 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg USD/QAR USD/QAR 12M Forward Bahrain.38.378.376.374.372.37 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg USD/BHD USD/BHD 12M Forward United Arab Emirates 3.75 3.7 3.65 3.6 3.55 3.5 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg Oman.39.385.38.375 USD/AED USD/AED 12M Forward.37 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg USD/OMR USD/OMR 12M Forward Kuwait.32.3.28.26.24.22 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg USD/KWD USD/KWD 12M Forward Last observations: May 31, 215 GCC in times of cheap oil: an opportunity for economic reform and diversification, June 215 23
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