Iran oil impact unparalleled

As Iran emerges from a decade of international sanctions, its Gulf Arab rivals are facing their toughest economic predicament since the global financial crisis.

Governments across the six-nation Gulf Cooperation Council are taking unprecedented measures to counter the slump in oil prices, curtailing some of the world’s most generous welfare systems to plug widening budget deficits. In some countries, contractors are facing delays in government payments, while companies are reducing their work forces to trim costs.

Every major stock index in the Middle East, with the exception of Tehran’s, plunged on Sunday as the prospect of Iran adding to an oil supply glut pummeled markets already reeling from falling crude prices and a global sell-off in equities. With oil priced below $30 a barrel, governments may have to eat further into benefits that citizens have enjoyed for decades — at a time of growing regional turmoil and a proxy confrontation with Iran from Syria to Yemen.

“The Gulf has been dependent on its energy exports and the public sector for 40 years; it’s all the region has known and there are no quick or easy answers to the problems it has brought,” said Simon Williams chief economist for central and eastern Europe, the Middle East and North Africa at HSBC Holdings Plc in London. Without a rally in oil prices, the burden of reforms “will have to be carried by nationals who will face rising costs and diminished real incomes,” he said.

Buying Spree

While Iran reeled under sanctions linked to its nuclear program, GCC nations used the oil windfall over the past decade to boost their reserves and set up sovereign wealth funds that acquired stakes in companies from Barclays Plc to General Electric Co. Governments swelled the public-sector with nationals while the majority of private-sector jobs went to foreigners.

That’s slowly changing. The Saudi Arabian central bank’s net foreign assets fell by $96 billion in the first 11 months of 2015 to $628 billion, and the government sold bonds for the first time since 2007 to finance a budget deficit of about 15 percent of economic output. Authorities plan to sell stakes in state-owned assets from hospitals to roads and airports and have reduced fuel subsidies.

“In more than 15 years, this is the first real fiscal challenge they’re facing,” said Raza Agha, chief Middle East economist at VTB Capital in London. “Taking these measures is a big thing.”

No Taboos

Leading the charge is Prince Mohammed Bin Salman, the king’s son and the second-in-line to the throne. In an interview with The Economist published this month, the prince said the government may privatize parts of its biggest oil company. No economic reform is taboo, his officials told the magazine, including laying off under-performing public-sector workers.

Bahrain and Oman have also raised fuel prices, and authorities in Muscat are considering plans to remove all corporate tax exemptions. Subsidies were reduced even in the United Arab Emirates and Qatar, two countries the International Monetary Fund considers better prepared to weather the oil slump than others because of the amount of assets they hold relative to the size of their populations.

“The political contract between the rulers and the citizens is based on a provision of wealth to the citizens, so any adjustment of the subsidies or of the other services will have some political risk,” said Toby Matthiesen, senior research fellow at the University of Oxford and author of “The Other Saudis: Shiism, Dissent and Sectarianism.”

Markets across the region are already feeling the pain. Banks are charging more to lend to each other, and investors are questioning the commitment of the region’s central banks to the dollar peg.

Stocks Drop

Saudi Arabia’s Tadawul All Share Index tumbled 5.4 percent on Sunday, extending its losses over the past year to 35 percent. The MSCI Emerging Market Index has fallen 26 percent over the same period.

“Ambiguity is high and all of the surrounding news is bad, with Iran sanctions easing and how their oil production and reserves are expected to flood the oil market,” said Mohammed Alsuwayed, the head of capital and money markets at Adeem Capital in Riyadh.

Etihad Rail, the developer and operator of the U.A.E. rail network, said Sunday it is reducing about 30 percent of its workforce, as Abu Dhabi seeks to trim costs after the slump in oil prices. National Bank of Ras Al-Khaimah PSC is also cutting 250 jobs as the U.A.E.-based lender adjusts to slower economic growth.

Dubai’s Exception

In a study released in December 2014, the IMF listed Dubai, the commercial hub of the U.A.E., as a successful example of economic diversification in the Gulf. Reducing reliance on oil is “very difficult,” and typically depends on policies put in place before the price shock, the study said.

Income from oil exports makes up 25 percent of Iran’s revenue in the year starting March 21, according to a draft budget submitted to parliament on Sunday. That compares with about 70 percent in Saudi Arabia.

Still, Iran has to make up a lot of lost ground before it can compete with GCC economies, and needs more investments to upgrade infrastructure, said Adel Abdel Ghafar, an assistant professor at Qatar University.

“Iran and the GCC are at different stages of economic maturity, so Iran will need investment in its upstream, downstream and they’re starting a bit late in the game,” he said by phone Sunday. “If Iran is able to catch up, then it can be a serious competitor.”-Bloomberg