Analysis |

The Gulf Has Become the Land of Very Few Economic Opportunities

With oil prices in free fall, and the very survival of their regimes at stake, many countries in the Middle East are running out of options — and the entire world might pay the price

A photo of Dr. Zvi Bar'el.
Zvi Bar'el
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An Emirati trader passes under the stocks display screen at the Dubai Financial Market in Dubai, United Arab Emirates, March 8, 2020.
An Emirati trader passes under the stocks display screen at the Dubai Financial Market in Dubai, United Arab Emirates, March 8, 2020.Credit: Kamran Jebreili,AP
A photo of Dr. Zvi Bar'el.
Zvi Bar'el

Since the end of January, 16,000 flights have been cancelled in the Middle East, according to International Air Transport Association figures, 75% more than the same period last year. This is but one indication of the losses suffered by the aviation industry in the region.

Saudi Arabia, which lost 15.7 million passengers and about $3.1 billion, is the hardest hit, followed by the United Arab Emirates, which lost $2.8 billion in flight cancellations.

Every state has its own way to deal with the collapse. UAE governments are helping their airlines with loans, postponing their debts and canceling taxes. In poor countries like Egypt, Lebanon and Jordan however, many airlines are likely to close down, with some are not expected to resume operations after the pandemic passes.

This places hundreds of thousands of aviation and tourism workers in immediate danger – from pilots and air crews, to maintenance and marketing people, travel agencies, tour guides, and everyone else in the industry. Social safety networks can only protect employees partially, but due to the already large unemployment rate in most Arab countries and the shortage of ready financing sources, the soar in joblessness could generate an uncontrollable public outrage and undermine the regimes’ stability, not only in poor states but among the rich ones in the Persian Gulf.

Banking on real estate

Last week, the UAE presented an emergency economic plan expected to funnel a whopping $100 billion into the economy, half to help companies and large corporations to stay afloat, and half to assist small and medium businesses and individuals. Small businesses could receive long term interest-free loans; individuals could receive better mortgage conditions, including lower deposits.

The Emiratis hope this will revive the real estate business, which has been in a deep slump since before the coronavirus era. Banks will be able to increase their liquidity and change the proportion between the loans’ volume and their self capital. They will be able to direct more money into the economy in addition to the billions of dollars the central bank has transferred to the banks’ coffers.

A foreign worker wearing a protective mask fills a car tank at a petrol station in Qatif city in the Eastern Province, some 400Km from the capital Riyadh, Saudi Arabia, March 9, 2020.
A foreign worker wearing a protective mask fills a car tank at a petrol station in Qatif city in the Eastern Province, some 400Km from the capital Riyadh, Saudi Arabia, March 9, 2020.Credit: AFP

The goal is to keep the economy functioning as much as possible and prevent the alarmed public from withdrawing its deposits and taking the money out of the state.

It is doubtful these steps will lead to a real estate miracle, because in such uncertain and rocky times people tend to keep their money in cash and not carry out long term purchases, even if they could be profitable later on.

Meanwhile, the oil...

Faced with these immediate problems, Gulf states are also extremely worried over the oil prices’ crash, which began with the price war between Russia and Saudi Arabia, and was exacerbated by a sharp drop in worldwide consumption.

Qatari police stand outside a hotel in Doha as a medical worker walks alongside people wearing protective masks over fears of coronavirus, March 12, 2020.
Qatari police stand outside a hotel in Doha as a medical worker walks alongside people wearing protective masks over fears of coronavirus, March 12, 2020.Credit: AFP

On March 10, Saudi Aramco, Saudi Arabia’s national petroleum and natural gas company, undertook to provide some 12.3 million oil barrels a day, 10 million of them for export, and on the same day Russia announced it would raise its production by half a million barrels a day. The oil price plunged immediately by about 30 percent. Then the coronavirus joined in, and crushed oil price further. Now analysts predict it may go down to below $20 a barrel.

This development is good for large energy consumers like Turkey (which is short of oil and gas sources) and small poor countries like Jordan, Lebanon, Syria and Morocco (which are now enjoying low prices). But for the Gulf states this is a threatening blow.

In order to support their emergency economic plans, and prevent their budgets from descending into dangerous deficits, Gulf states cannot afford for the price to go below $40-$50 a barrel. OPEC members are expected to cut the oil quota by 1.5 million barrels a day to raise the price, but such a slash may be too little too late in view of the huge surplus accumulated by the oil producers.

Some 80 oil tankers at sea are currently serving as silos, because the oil owners can’t find clients or storage places for the oil on land. This headline on business site AME, operating in the UAE, says it all: “Invest in crude oil storage tanks. There is no place to put the commodity.”

Eventually, Gulf states might find themselves forced to sell assets they own abroad to finance their survival in an era when the cost of producing oil exceeds revenue. The repercussions on the global economy are too catastrophic to contemplate.

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