Gulf country risk: Qatar, Saudi Arabia on shakier ground

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By:
Jeremy Weltman
Published on:

Prospects are improving, but the negative impact of Qatar’s isolation, given oil price volatility and the lack of diversification, has removed the cushion of safety the region took for granted.

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Oil volatility continues to hamper the region, clipping the wings of investment growth


Several countries in the Gulf region saw some improvement in their investor risk scores towards the end of 2018, as public spending cuts and better oil prices aided fiscal balances, and economic growth rates improved.

The region as a whole is likely to see real GDP growth accelerate in 2019, to 3% from 2.4% in 2018, after contracting by 0.4% in 2017, according to the IMF.

It seems well supported by investment spending, including ongoing infrastructure development linked to Qatar’s hosting of the 2022 FIFA World Cup.

The outlook for Kuwait and the UAE is brighter than the rest, owing to the five-year development plan in Kuwait and Expo 2020-related outlays in the UAE.

“[Moreover], the UAE and Kuwait are set to post fiscal surpluses in 2018, due to the recovery in oil prices,” notes Bank Audi, a contributor to Euromoney’s risk survey, in recent research.

Saudi Arabia, on the other hand, is expected to register a modest deficit, according to Bank Audi, “as Bahrain and Oman are likely to continue to report mid-digit to single-digit deficits”.

A typically upbeat prognosis from the Dubai Chamber of Commerce and Industry mentions the UAE is likely to see strong growth in its transport and communications sector, and higher investment and private consumption.

Higher risk

However, Euromoney’s survey highlights how the region is also considerably riskier than five years ago.

Non-oil export growth remains minimal, and the region has seen inflows of foreign direct investment stall in recent years, despite providing investment incentives and tackling red tape, which the IMF says requires more reforms to diversify economies.

With sharply devalued oil prices weighing on government budgets, and the diplomatic crisis isolating Qatar, all six Gulf Cooperation Council member states have seen their investor risks escalate on a five-year trend basis:


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Bahrain is the riskiest of all, lying 72nd in the global risk rankings within the fourth of ECR’s five categories of risk.

The budget deficit and social instability have seen its total risk score downgraded by 7.5 points since 2013.

Bahrain has the lowest scores for institutional risk and information access/transparency, slightly worse than Saudi Arabia’s.

Similar trends are evident for Oman (50th in the rankings), downgraded by 11.9 points since 2013, for Saudi Arabia (one place above), slipping almost nine points, the UAE (36th) down 6.4 points, and Kuwait (33rd), four points lower.

As for Qatar, still the region’s safest prospect, it too has succumbed to the regional downturn. It is now 8.1 points lower than in 2013, sliding 12 places to 28th behind South Korea, Japan and Slovenia in the rankings, with political risk indicators also downgraded due to heightened regional tensions.

Still all about oil

Survey contributors are hopeful economic conditions will improve, but are equally pragmatic in light of the effects of tariff wars, tightening global financial conditions and uncertain oil market trends.

Global prices have recovered after sliding below $30/barrel in early 2016.

However, after reaching $85/barrel in October 2018, the market took another tumble in the final months of last year, caused by over-supply in the market and reflecting heightened financial markets volatility, factoring in the prospect of slowing global economic activity in 2019:


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Research published by Jadwa Investment, another firm contributing to Euromoney’s survey, suggests a gradual lift in oil prices will occur “as Opec data confirms compliance to the agreement and OECD oil stocks fall to lower than the five-year average”.

The firm then expects oil markets to remain fairly balanced “due to a combination of waivers expiring for importers of Iranian oil, and because of a roll-over of the Opec-plus agreement into H2 2019”.

Taking all that into consideration, Jadwa has revised down its Brent oil price forecast to $66/barrel for 2019, compared with $75/barrel previously.

Tight fiscal policies and oil production cuts are likely to keep economic growth in check, and according to one recent prediction, by London-based Capital Economics, Saudi Arabia will expand by just 1.3% this year, and 1% in 2020, down from 2.5% in 2018.

ECR survey contributor James Reeve, chief economist with Samba Financial Group, says the general downturn in oil prices since October will continue to affect private confidence and investment.

He sees the UAE growing this year, but its position is not helped by the large overhang of property. This will “drag on investment growth, especially after Expo2020 has been and gone”.

The risks are largely on the fiscal side, but some countries are more exposed than others, says Reeve, citing the fact Bahrain and Oman “have done very little to get their fiscal houses in order”.

He adds: “Oman in particular has built up a large external debt position in very short order without making any meaningful domestic spending adjustments.”

Kuwait, Qatar, UAE and Saudi Arabia, on the other hand, have substantial net foreign assets to draw on to finance fiscal positions.

That said, countries such as Saudi Arabia and Qatar that tap external markets regularly “must be mindful of external views of their policies and will need to adjust spending to fit the new realities”, concludes Reeve.

Meanwhile, the Institute of International Finance is warning that compliance with the latest Opec deal to lower production means that economies will be dealt a double blow from falling production and prices – the latter influenced by rising shale output from North America.

Bahrain, Oman and Saudi Arabia are heavily dependent on oil, and are the most exposed, underlined by the fact they are the lower-ranking Gulf countries in Euromoney’s survey compared with UAE, Kuwait and Qatar.