BUSINESS OUTLOOK: So Long To Oil Dependency

GCC economies must move away from oil-dependency and diversify their economies, according to Mohamed Zidan, chief markett strategist at ThinkMarkets.

GCC states must diversify their economies

BY Mohamed Zidan

More than two months ago, a natural disaster hit Alberta, the oil-rich Canadian province, causing interruption in production for weeks.

The wildfire witnessed by the state was devastating to the extent that 90,000 people were evacuated and human activity was completely halted.

At the same time, large scale explosive attacks hit major oil facilities and production sites in Nigeria, and threats of the same kind are still present. The attacks are frequent and challenge the federal government of the biggest oil producer in Africa.

The oil workers’ strike in Kuwait was another reason of the drop in production that marred the oil sector throughout the second quarter of 2016.

Furthermore, the OPEC meeting held in Doha last April, which failed to reach an agreement on production, killed expectations that the biggest oil producers would agree on a production freeze any time soon.

Tehran is against freezing its own production before retaining the levels it had prior to sanctions which is around 3.5 million barrels a day, much against Saudi calls for having a production freeze.

There are also signs which reflect the intention of most Arab Gulf states to continue ramping up production. One sign is the expansion of new oil wells and projects in this region.

Meanwhile, Saudi Arabia and Kuwait have witnessed their first budget deficits in decades, which has pushed them to address the funding gaps.

Both countries are still unclear over the start of Khafji oilfield. In March, they agreed to restart production in the super field that produced 280,000 to 300,000 barrels per day. The Khafji oil field was closed in 2014 due to environmental concerns.

The news shaved off any hope of solving the persisting glut in the market, while some see that the objective of such an expansion is to increase production to fill the funding gaps in their budgets by trying to offset low prices with more sales.

Based on the aforementioned events, and the oversaturated oil market, oil prices are expected to remain on the south side of $50 per barrel for a long time.

This way Arab Gulf countries have one of two choices: waiting for more disasters, natural or human-made, like wildfire suffered by Alberta in Canada, or terrorist attacks on oil facilities, to push oil prices up. Or, focus on a policy to diversify their economies as means for new sources of income.

When it comes to diversified economies in this region, one shining example is the United Arab Emirates. It has successfully managed to diversify its economy away from oil.

Today, the hydrocarbon sector is responsible for around 30 percent of the UAE’s national gross domestic product.
The country has managed to reach this by focusing on other sectors such as trade, services, hospitality and tourism, which enabled it to avoid a hard hit by oil prices collapse.

On the other hand, countries such as Kuwait and Saudi Arabia, which are highly dependent on oil revenues, have found themselves in a financially critical situation especially with the announced budget deficits.

Borrowing from international markets has now become frequent among GCC states to recover their financial health and fill the funding gap.

Oman led the way by borrowing $1 billion loan and issuing a $2.5 billion Eurobond this year. Qatar and Saudi Arabia are also not far from Oman’s recent step, but their funding needs demand up to 10 folds of what the Sultanate has borrowed.

Kuwait has issued 600 million dinars ($2 billion) of bonds and Islamic financial products such as tawarruq, much like the Islamic bonds, since the beginning of its fiscal year which started on April 1.

Meanwhile, Saudi Arabia, which has already borrowed $10 billion dollars from a number of lenders including Goldman Sachs and Morgan Stanley, is looking at diversifying its source of income away from oil.

The recently announced Saudi Vision 2030 addresses that matter.

However, no step comes without obstacles. It is argued that one problem that faces the Kingdom is that it has one of the highest paid, yet less productive local workforce.

This, combined with one of the least diversified economies in the region, as well as lack of proper regulations that would help open such an economy to investors, works as a block in the face of attracting foreign direct investments.

Cutting down subsidies was the first step taken by Qatar and Saudi Arabia’s governments, and it was supposed to be an initial step towards economic reform and realizing further growth through decreasing public spending.

But it seems that such countries have partially cut down subsidies because there is no money to pay for it, rather than making it a step towards economic reform.

So far, it is a race against time for GCC states, and they can only win it by introducing the required economic reforms and diversifying their sources of income, especially if oil prices do not go back to the higher levels prior to august 2014.
Mohamed Zidan is the chief market strategist at ThinkMarkets.


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