At the same time, the OPEC+ price war has introduced another major earthquake threatening to destroy the future of major oil and gas sectors worldwide. Oil and gas producers are threatened not only by a continuing slump in oil prices but also due to possible final demand destruction. With major crude prices hitting historic low levels, the end is not near. OPEC leaders Saudi Arabia and UAE, supported by some of the other Arab producers, continues its current course of flooding the market even that demand for oil and petroleum products is down by maybe 20 million bpd the coming months. Former OPEC+ member Russia also is continuing its destructive move to increase production at a time of demand collapse. While everybody is watching US shale oil or non-OPEC conventional producers, the Gulf Cooperation Council (GCC) members are heading to a brick wall that could severely damage the future. As most Arab Gulf countries are still prime examples of Rentier States theories, government budgets are heading to renewed high levels of deficit, while income generation has almost vanished. Financial pressure on Saudi Arabia, UAE, Bahrain, Qatar or Bahrain is expected to become extremely high, if no other sources of income or financial influx is generated quickly.
The first signs that financials of GCC countries are under pressure is the blood on the wall of the respective sovereign wealth funds (SWFs) of the region. More and more information is published that Arab governments are accessing the vast wealth of their SWFs, such as the Public Investment Fund (PIF), Abu Dhabi Investment Authority (ADIA), Mubadala or Mumtalakat (Bahrain) to lessen the pressure. Media sources are reporting that inline with the Norwegian Petroleum Fund, the largest SWF in the world, oil producing MENA countries’ SWFs are looking to dump up to US$225 billion in equities. American investment bank JPMorgan reported that the worldwide and fast spread of the Corona Virus, which has ravaged the global economy, sending markets into a tailspin, and lower oil and gas prices, have cost both oil and non-oil based sovereign wealth funds at present more than $1 trillion in equity losses.
SWFs based in oil producing and exporting countries have not the choice at present to stick with some of their equity investments, which could mean risking more losses. At the same time, it has become clear that GCC governments have started to pressure SWFs to support their home-countries, as countries have been hit by a financial double-whammy, looking at the oil price slide and increased calls for government based backed financing of emergency budgets and economic sectors. Western media have been looking mainly at the ongoing developments and divestments being reported by the Norwegian petroleum fund, which is reportedly to have offloaded around $100-150 billion in stocks, with a possible further sale of $50-75 billion coming. Arab SWFs are looking at the same strategy, afraid of being confronted by a situation in which assets will have distressed valuations. The current approach is not an unusual one, as one of the main reasons to set up a SWF in general is to be able to counter or mitigate economic recessions in the future. The current toxic mix of Corona Virus, economic recession and oil price collapse, however is a very tricky one. By selling at present, possible future value is lost, while no real positive outcome is imminent from additional investments made in the local economy, as fundamentals are totally in stress.
Arab sources have indicated that divestments of equity and real estate already was started on a minor scale when oil prices started to slide after the peak of $70 per barrel in 2018. Increased liquidity was already part of the plan for some. In 2018-2019 however the emphasis put was on increasing liquidity from selling short-term money-market instruments such as treasury bills. State Street Global Advisers stated the last days that it is seeing a shift toward cash since the crisis started, but it’s not a panic move but rather gradual.
The total amount at risk for Arab SWFs is at present unclear, even that signs can be seen. The main constraining factor to assess the real situation at the SWFs in the GCC region is that transparancy of their total funds under management and specific sectors are not available. Indications of total volumes can be made, but should be taken with a truck load of salt.
Kuwait’s state fund General Reserve Fund already has been asked to cover the expected deficits of the government budget. To shore up the economy, to mitigate Corona effects, the help is called in. To provide liquidity for small- and medium-sized enterprises to meet their obligations, in addition to full support of the Kuwait Central Bank and local banks, the country has drawn down on its state fund, the General Reserve Fund, to cover its deficit. Officials already indicated that the government withdrew 43.8 billion Kuwaiti dinars ($139.70 billion) in the five years until the 2018-2019 fiscal year, and 3.7 billion dinars in the 2019-2020 fiscal year. Looking at the available reserves, the fund is slated only to hold 14 billion dinars ($44.65 billion), which is critical. Kuwait already has been warned by international ratings agency Moody’s that it has placed Kuwait’s Aa2 rating on review for a downgrade, citing a “significant” decline in government revenues. The latter will also be the case for other SWFs is the general feeling. In contrast to Kuwait however, the SWFs of Saudi Arabia, Qatar or UAE are not yet looking at the bottom of their coffers. Still the overall situation will become dark very soon. As the Institute of International Finance reported this week “quarantines, disruption in supply chains, the crash in oil prices in light of the breakdown of OPEC+, travel restrictions, and business closings point to a recession in the MENA region, the first in three decades”. Overall economic growth levels of the oil exporters in MENA are expected to grow at only 0.8% this year. Critical remark on this is that these assessments are based on an average oil price of $40 per barrel, while WTI/Brent are hovering around $20 per barrel, with a downward potential that is large.
When we will see the divestments of major equity or bond holdings by SWFs in Saudi Arabia (PIF), or UAE (ADIA/Mubadala/EIC) etc is unclear, but the signs are on red for sure at present. Possible fallout for global economies from this will need to be assessed, as the SWFs hold vast holdings in real estate in USA and EU, especially UK, but also in High-Tech and other champions on NYSE, LSE and Frankfurt. The PIF holds significant shares in everything from ride-hailing app Uber to Japan’s SoftBank. The need for the sale is clear, as MENA exporters are expected to see hydrocarbon earnings fall by nearly $200 billion this year, resulting in a loss of more than 10% of GDP in this sector alone, the IFF report stated. With price levels for longer at $20 per barrel, the hits will be harder, as even producing and exporting more barrels will not mitigate the price losses. The financial troubles are not over yet, not only in the GCC but also for North African or other Arab non-oil rich countries. Economic downturn in GCC will have a knockdown effect on total MENA economics as young people from Lebanon, Jordan, and Egypt – with its population of 100 million, have for decades turned to the Gulf Arab states for jobs. The IFF has warned that a “global recession will lead to a reduction in trade, foreign direct investment, tourism flows, and remittances to Egypt, Jordan, Morocco, and Lebanon”.
All GCC countries are going to be hit at the same time, but especially Bahrain and Oman, Bloomberg Economics stated. Qatar, the United Arab Emirates, Saudi Arabia and Kuwait are deemed robust. Bloomberg expects Bahrain’s budget deficit is expected to widen to about 13 percent of gross domestic product in 2020. Bloomberg Economics reiterated that Bahrain, Oman, Iraq, as well as Iran, are the weakest when measured by a set of five criteria ranging from international reserves and public debt to the price of oil needed to balance the current account. Goldman Sachs projects Bahrain’s government funding requirement will reach around $3.8bn this year, net of the $1.8bn financing from the 2018 Gulf lifeline. It also has a $1.25bn Eurobond coming due at the end of March. For Oman the hit is mainly linked to the interlink between oil prices down and Oman’s currency peg. The IMF has warned that Oman could be facing its seventh straight year in the red, with a fiscal shortfall in 2020 of 8.4 percent of GDP.
For the three main parties in the GCC, Saudi Arabia, UAE and Qatar, the situation is not as dire yet but the crisis will have a detrimental impact possibly on the ongoing economic diversification plans in the respective countries. The main party under duress is going to be Saudi Arabia, which has just embarked on a very aggressive and long-term Saudi Vision 2030 planning, which was meant to end the kingdom’s “addiction” to oil, and transform it into a global investment power. After several years of successes, including the unexpected but successful Aramco IPO, the country is now looking at a total global situation threatening to stop cold its plans. The IPO and the hundreds of reforms were designed to boost foreign direct investment (FDI) to 5.7 per cent of GDP by 2030. Privatization, localization and change are the cornerstones of Vision 2030, but now facing an uphill battle as the money runs out. The Corona Virus, economic global meltdown and plunging oil prices put public-private partnerships, the Saudi business environment, and local capital markets, or FDI, at risk. All changes were and will be linked to attracting foreign direct investments and the set up of companies in Kingdom. This is now hitting a brick wall, and are maybe threatened before the first leaves of success are seen. The rosy picture of before 2019 now is over. The optimism indicated by the IFF that the Kingdom will have a GDP growth of 2.2% in 2020 is not going to materialize. Other non-oil sectors were even predicted to grow by 2.7 per cent between 2020 and 2022. To keep the wheels turning for Vision 2030, a multi-trillion investment spree is needed to put in place the major giga-projects like NEOM, the Renewable Energy Project and Amaala Project on the Red Sea. All these projects are going to be delayed, or maybe some are even put on ice. Without international banking and finance, Saudi Arabia’s only other option will be to use its still vast financial reserves. However, to put them at risk without knowing the situation post-Corona is a large gamble that the Saudi royal family should not be taking. Better to delay and ride out the storm than to sink.
The UAE’s future is also in doubt, as vast parts of the Emirates, especially Dubai and Sharjah, are linked to international trade, tourism and investments. The current global crisis has resulted in a meltdown of the tourism industry and air traffic. Dubai 2020 and other main events are going to be delayed or cancelled, while the investments will need to be repaid. Dubai’s already fledgling financial situation will be dire, while Abu Dhabi will most probably not be able to cough up the cash to pay the bills for all. Abu’s main strength, the income revenues of its national oil company ADNOC, is also being threatened, but financially not at risk yet. Abu Dhabi’s main SWFs, ADIA and Mubadala will be able to be used to soften the impact. Some high-risk and futuristic projects in the Emirates will be for sure delayed.
Overall it maybe premature to become very negative, but the effects of the current storm will be felt. The need for diversification also again has become clear to most of the GCC countries, but time is running out. At present the main strategy is to weather the storm, not hit the rocks and find a safe haven. Delays in Saudi Giga Projects are to be expected, but implementation is needed in the coming years to counter other societal risks, such as unemployment and future stability. The Emirates will need to diversify without putting too much pressure on the different entities. Abu Dhabi’s strong leverage over the other emirates is still strong but can only be kept in place if its oil and gas addiction is supported by other new high-tech and financial sectors. Dubai is heading for a perfect storm, as it is confronted by several issues, mainly linked to financial problems. By having only poker cards in tourism and air traffic is now shown as a too weak hand to deal.