Gulf countries need comprehensive solution to meet pressures
It is difficult to diagnose the nature of the economic crisis in the Gulf region. The economies of the countries of the region are showing contradictory signs that are difficult to analyse and interpret, especially when political and psychological factors mix with objective data, making it difficult to see through the various layers. Undoubtedly, such factors are important and affect practically all of the world’s economies, but the Gulf states have been relatively immune to them due to the availability of a major balancing factor, and that is oil revenues. In many countries, markets and trade may be affected by the political rise of this politician or the other, or by the arrival to power of some party, and we know that the business sector is susceptible to changes in the public mood. But the Gulf economies have been immune to these fluctuations; until the current crisis, that is.
Even before the spread of the COVID-19 pandemic, Gulf economies had come under the pressure of falling oil prices. The price of a barrel of oil today is one third of what it was years ago. And that is a huge drop. At some point, crude oil prices reached the incredible limit of $120 per barrel, but did not stabilise at that rate for long.
Some might argue that the catastrophic drop in oil prices was brought about by these same oil prices themselves. Crude oil became so expensive that the production of shale oil suddenly became profitable. The oil giants rushed to invest in the production of shale oil first, and in improving the techniques of extracting it second.
Energy-saving technology compounded the crisis by driving down the demand for crude oil. To get an idea of how much energy could be saved by these forms of technology all we have to do is imagine ourselves flying over a continent like Europe by night knowing that every incandescent bulb of every lamp post on every street in every city has been replaced with LED technology. That’s a lot of energy saving, which translates into a significant drop in the demand for crude oil.
Today, the European continent uses only a fraction of what it used to consume to light its streets. Add to that the savings made by producing energy-efficient home lighting and appliances, TVs and highly efficient motor engines. Gone are the days of gas guzzlers. Today, 1500cc green engines are used efficiently and effortlessly to power Mercedes Benz automobiles that used to be driven by 3000cc engines.
If demand for oil continues to exist at all, it will be thanks to the growth of energy-hungry nascent giant economies like the ones in China, India and many other countries. But these are poor countries to begin with that have gotten used to consuming just enough fuel for their survival and were never able to bridge their energy gap with the developed West.
In short then, worldwide oil consumption has continued to hover around the same rate, while production of both crude oil and shale oil has continued to increase. The inevitable result has been a drop in prices, and in some cases a total collapse of these prices. These days, the world also knows more about natural gas, and we have witnessed the emergence in the energy market of new natural gas-producing giants.
OPEC’s problems are well known. Disputes inside the oil cartel often mix economic factors with political ones and are compounded by the stubbornness of individual members. Some member countries, like Iraq, dropped out of the production circuit for years, while Saudi Arabia increased its offer of crude oil by the equivalent of the production of one additional country. With the Russians coming into the game, a clash with Saudi Arabia became inevitable. Dumping and controlling quotas and markets became the standard modus operandi of OPEC and OPEC+ countries, which emerged after a number of non-OPEC countries surrendered the game to the oil giants.
Before OPEC+ could control the situation, the COVID-19 pandemic came and the rest of the story was history, as they say. Right now, no one can venture a guess about when and how the biggest recession in recent history will end, and no one has any idea what its medium and long-term effects will be.
The global situation was reflected in the general mood in the Gulf. Austerity measures have begun, budgets have shrunk and talk of diversifying income sources has been silenced. The economic driver for the region is oil revenues and government spending of those revenues. Some Gulf states are fortunate to have taken advantage of the financial window that was available to them and constructed strong and durable infrastructure, but others are more exposed to the devastating shock.
With austerity, and even before it, layoffs of migrant workers began. For over a decade now, the dominant economic debate in the Gulf has been about how to replace the expatriate labour force with nationals. The assumption is that you can reduce government spending, foreign remittances and waste by replacing expatriate workers with national workers. Some countries will never be able to do this for purely demographic reasons. They simply won’t be able to find the suitable national manpower for millions of jobs while the country’s whole indigenous population is less than a million. Others are betting on training their citizens and turning their practical aspirations towards non-office work. It is still too early to judge whether replacing expatriate saleswomen in perfume stores in Riyadh with Saudi women, for example, could be part of the solution to the country’s economic problems.
As if that wasn’t tough enough, we also have to consider the issue of salaries offered to local manpower. In general, Gulf citizens have gotten used to high salaries generously offered by their governments in times of financial abundance. But today these same governments are facing the challenge of trying to continue providing these high entitlements. Salaries in the Gulf region are high by all international standards. It is rare to find a mid-level employee in Europe being offered a tax-free monthly salary of $10,000, but it is very common to find Gulf nationals in similar positions receiving over $15,000 a month, with no real taxes to pay. The current budgets in the Gulf might be able to continue paying these inflated salaries to their citizens for the foreseeable future, but many of these employees are on their way to severe financial problems, caused to a large extent by these same high salaries.
The Gulf citizen is a merchant (or businessman in the modern term) by nature. When the state provided him with a high salary, and gave him a building grant, a plot of land, healthcare and free education, he found an abundance of spare money on his hands. In the meantime, millions of expats were in the Gulf and in need of housing, and they can’t own property in most of these countries. With his savings and an easily obtained bank loan, the Gulf citizen would embark on a real estate project. Banks see no problem whatsoever in advancing sizeable loans to employed citizens pulling in $30,000 a month. Given these conditions, there was a real estate and construction boom in all of the Gulf countries. Residential and commercial buildings mushroomed and, with the expats being able to afford living in the Gulf, paying rent, eating out and seeking entertainment, it was a win-win situation. The Gulf citizen becomes the owner of property whose value is always on the rise, collecting enough rental income to pay off the bank loans and their interests and then some. His salary goes straight into savings. So what can go wrong?
But then the property owners’ respective countries’ started offering expat jobs to their nationals. Buildings began emptying or in the best cases, their owners, under pressure to repay loans, were forced to reduce the rent. It was still manageable, though, as long as the income from the rent could cover the loan payments
But the second blow came in the form of the coronavirus pandemic. Renters either left the country or were unable to pay all or part of the rent. So, rental incomes took a deep dive and couldn’t even cover 50% of the loans owed to banks. It was time for the Gulf citizen cum real estate developer to dig into his pockets and use his inflated salary to pay off his debts.
So far, the Gulf governments have been able to ward off banks from pressuring loan defaulters, but it is hard to guess how things will evolve. In any case, some Gulf capitals where ten years ago real estate owners were racing to convert their commercial buildings into apartments have ended up with many ghost buildings. The expats have either gone or cannot afford the rent.
This is the prevailing negative psychological factor reflected today in business life in the Gulf and gives the feeling that the crisis is enormous. And the difference between then and now is also big, and not only in the price of oil. The Gulf states were very rich when oil sold for twenty dollars a barrel. At the current price of forty dollars, it is still a good deal given the low production cost. The difference is in how complex and overlapped the crisis is.
So, do Gulf states dispose of a middle-way solution that can deal with the repercussions of the coronavirus pandemic, the austerity measures and the nationalisation of jobs at the same time? How can they reassure their citizens and communities of expats alike? Well, one thing is certain. Neither waiting for the coronavirus pandemic to lift, nor tightening austerity measures, nor waiting for the miracle of rising oil prices, nor encouraging expatriates to leave is the solution. None of these options by themselves are suitable solutions. The matter requires a comprehensive and cool-headed review in countries that realise they will remain wealthy and that it is important to confront the psychological factor before taking economic measures.