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Tough Times Ahead for the Gulf States

By Gabriele Lengwin | December 11, 2015

In future the Gulf States will be forced to learn how to save, to be more economical. The citizens of these Arab states will also have to make adjustments to upcoming changes. The main reason for this is the slump in the oil prices. This and other factors will have a significant impact on the growth of these countries, and in turn, investments and profit or loss as well. The situation in the Middle East is a cautionary tale of a gold rush struggling not to go bust.

Theses "growth stars" in the Middle East, have been known for their megaprojects. This is why the Hamad International Airport in the capital of Qatar, Doha, having a value of 15 billion Euro, represents the investment strength in the Gulf. However valuable this piece of real estate is however, a few days ago an act of nature showed us how unforeseen events can alter perception, and reality. As it turns out, heavy rainfall the other day revealed a huge leak in the roof of the airport, now architects, directors of construction companies and chief engineers have not been allowed to leave the country until the problem was solved.

Riyadh, Saudi Arabia

Riyadh, Saudi Arabia - Creative Commons

A similar scenario occurred in Saudi Arabia: The biggest construction company at the Gulf, Saudi Binladin Group, is not allowed to accept any contracts, and intends therefore to lay off 15,000 of its 200,000 employees. The main reason for this is an accident that occurred in Mecca: Due to a sand storm, one of the company’s cranes crashed onto the Mosque of Mecca and buried around 107 pilgrims.

These peculiar events are putting a burden on the construction giants from this unique angle of fate. Meanwhile a much more broad reaching market event has everyone in selected oil producing states scrambling. In 2014 oil was pegged at $115 dollars a barrel (status as of June 2014), and today the life's blood of these OPEC states has decreased significantly by 60 percent.

"Dubai - crazy roads and beautiful malls.

In Dubai crazy roads and beautiful malls are a fixture these days. What the future holds depends largely on oil prices

In Saudi Arabia alone, after many years of surplus, an enormous budgetary deficit is being anticipated. The International Monetary Fund (IMF) estimates a deficit of 100 billion dollars or 21.6 percent of the country's economic output. While Saudi Arabia is a very rich country, and nearly without and debt at all, next year its liabilities could increase from 6.7 percent (2015) of the gross domestic product (GDP) to more than 17 percent. The IMF issued the warning too, that without an austerity program, Saudi Arabia will not have any liquid funds within five years.

As a reaction to this, Saudi Arabia stopped some of its projects and its central bank sold European shares with a total value of 70 billion dollars. Furthermore, airports are going to be privatized soon and for the first time since 2007, Saudi Arabia issued bonds on its national market. The next step will be the entry on the international markets and billions flowing directly into the government’s treasury.

The serious problems listed above constitute a threat to the stability of Saudi Arabia, therefore. If the country's population cannot depend on the veritable pampering they have grown used to in past years, they may soon lose confidence in the government. Most experts realize a part of the oil revenues has been used to reassure the population, so far. This is why king Salman made his state employees a present of two monthly salaries at the beginning of his rule. This is a gift equivalent to 30 billion dollars. No nation on Earth can carry on offering such frivolous gifts.

Another warning sign we see today is an apparent power struggle at the royal court. This is why some experts find it alarming that the king has been criticized in public. Moreover, just recently, one grandson of the founding king requested a new political leadership in Saudi Arabia. Already there's moaning and groaning from not only some leadership, but also form the people. This Guardian article from October speaks of a secret memo that revealed King Salman had already slapped drastic austerity measures on the populace. To quote the article:

"One letter marked “Highly Confidential and Most Urgent” dated 14-12-1436 (28 September 2015 in the Islamic calendar) gives strict instructions to stop any new projects, end the purchases of any new vehicles, furniture or other equipment, freeze all appointments and promotions, stop compensation payments for property, and halt any new rental agreements."

In general, an economic relaxation is not in sight, moreover because Saudi Arabia has linked its currency to the dollar. An increasing dollar exchange rate and the forthcoming interest rate turnaround will have a great impact on these oil states. Saudi Arabia has very little income from commodities other than oil, there is not much income from taxes, not even a VAT imposed on the people there. Subsidies, and out of control wage situation, and other major problems confront these once fabulously wealthy countries today.

When the slump in oil prices was initiated Gulf States proclaimed their bulletproof economic strength. Budgets soared (Reuters January, 2015) as if money was growing on the proverbial trees. The developers and officials there proclaimed vast new real estate and infrastructure projects would go on unfettered. Today the other foot has fallen. Saudi Arabia, the United Arab Emirates, Qatar and Kuwait are facing crunch time. Some reports suggest Saudi Arabia could be completely bankrupt by 2020, while even more moderate projections foretell of vast austerity measures needed. In its regional economic outlook, the International Monetary Fund warnedSaudi Arabia might go bankrupt within the next five years if the government maintains its current policies. Multaq al-Morished, CEO of the petrochemical and metal giant Tasnee, had this to say about the situation:

“We shouldn’t kill the goose that laid the golden egg. We have raised her for 30 years and if we don’t watch out, we could just kill her.”

These warning arise amid much resistance, with an obvious answer of the eliminations of subsidies for at least gasoline, water and gas prices. If there is a glimmer of hope, it's news some experts see the crisis as an opportunity. Even if 90 percent of Saudi Arabia’s revenues are coming from the oil business and the costs for the war in Yemen are enormously high, the diversification of the economy could experience an upswing.

Besides Saudi Arabia, other Gulf States feel the effects of the low oil price. The United Arab Emirates (UAE), for example, have already increased the price for gasoline by 24 percent and are intending to introduce a corporate and a value added tax. This means a shift in policy, since the UAE have been considered as a tax haven, so far. It should be mentioned that the situation of the UAE is relatively good, compared to other Gulf States, because the majority of the GDP does not come from the oil business, but from other sectors of the economy.

Even if many Gulf States have stopped or minimized some of their megaprojects, their construction projects remain ambitious: A so-called Kingdom Tower is going to be built in the Saudi port city Dschidda. This tower will be 1000 meters high and the highest skyscraper in the world.

Not only are such prestige buildings being planned, but also universities, hospitals, apartments and industrial cities. This is why German companies such as Siemens, see their opportunities and hope to get one of these projects. In the field of energy supply, German companies see an important chance, as well: Until 2030, solar modules shall be installed on every roof in Dubai. In addition, the biggest solar park in the world having a capacity of 5,000 megawatts will be built in Dubai. These and other positive measures and potential mitigate the otherwise negative news a bit. However, a reverse in politics and economy involves both opportunities and risks. Nevertheless, the biggest hope of the Gulf States is on the soon increase of the oil price.

Gabriele is Director of Social Media and an Executive Assistant atCapital Value S.A. in Luxembourg. She is also holds a BA from University of Applied Sciences in Trier in languages and international studies.
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