Boom time for Gulf states requires sensitive handling
Budget surpluses increase options for many businesses and governments in the Gulf, but there are challenges for exporters and other sectors. The need for diversification in overseas investments and the internal economy is paramount
Surging budget surpluses and foreign reserves, low unemployment and increased options for overseas investments are features of the Gulf economies following the recent rise in oil prices. Finance ministers and many citizens around the world will look on with envy.
The region will receive a further economic boost when football fans descend upon Qatar for the FIFA World Cup starting next month, helping many businesses recover from the fall in trade during the Covid lockdowns in 2020-21.
Government revenues will receive a boost. The Qatar government had drawn up a budget for 2022 on the basis of an average oil price of $55 per barrel – yet the market price has been mostly above $80 this year. In addition, the rising value of the US dollar – up by around 15% in 2022 – has meant that the local currencies in the Gulf (given the USD peg) have maintained their purchasing power, providing an advantage when importing non-USD priced goods from around the world.
Yet this doesn’t mean that everyone is thriving, or that there are no difficult decisions for business leaders and policy-makers in the region. So what are the disadvantages and potential hazards in this time of apparent plenty? First of all, stronger USD and oil prices do not benefit all companies or households. Oil and gas do not comprise the whole economy; for some years now, the Gulf has been more diversified than may be the popular perception outside the region. There is a possible global recession and the rising dollar means exports from the Gulf have become more expensive. A manufacturer and exporter of fertilizers, for example, is likely to face reduced demand and reduced margins simultaneously. As regards tourism, as I noted in an earlier column, Gulf resorts have become more expensive compared with rival destinations in the Mediterranean and the Indian Ocean.
Inflation has been rising in Gulf economies; it is difficult to curb because it is primarily imported inflation through increased cost of imported food. Higher interest rates negatively affect companies with significant borrowings, which includes some in the important property sector. There have been significant investments in retail, industrial and residential real estate in the region in recent years. Developers will not always be able to pass on the rising cost of debt to customers in the form of higher rents or sale prices. The consolation for those companies that may be struggling is that the healthy public sector surpluses mean that governments can step in to assist, for example through soft loans.
Diversification of the Gulf economies becomes a key theme. Oil prices are currently high, but they are volatile and unpredictable, and it is unstable to be over-reliant on a commodity. Diversification is a theme in investments, also. Middle East investors will be looking for relatively low-priced, value stocks during the current downturn. They will seek to avoid being over-exposed to a fashionable investment class – or indeed, to any single sector. Investment choices when recycling surplus reserves will be the key theme of the next article
First published in Gulf Times on 31 October 2022.