Lessons from the Gulf s Twin Shocks

Transcription

1 Lessons from the Gulf s Twin Shocks Ibrahim Saif Stanford April 26, 2012

2 Outlining the Twin Crisis The oil-rich economies of the Gulf Cooperation Council (GCC) are facing a twin challenge to their stability The eurozone sovereign debt crisis has depressed the demands and consumption and presents the risk of contagion The Arab Spring has triggered a massive wave of domestic spending, which is straining fiscal balances and threatens to reignite inflation

3 The Eurozone Crisis The crisis has accentuated volatility of the oil prices, with oil exports account for between 70 and 90 percent of GCC government revenue Decreased demand from the OECD generally, Price of Oil USD per Barrel

4 The Eurozone Crisis The crisis has raised the possibility of widespread financial contagion This includes losses for the Gulf s institutional investors (including sovereign wealth funds) with substantial holdings in distressed European banks GCC exposure to European Banks USD (millions) Oman Kuwait Qatar Saudi Arabia United Arab Emirates Amounts outstanding to European Banks Amounts outstanding to European Banks as a % of total foreign claims Bahrain 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage

5 The Eurozone Crisis Furthermore, a prolonged financial crisis would raise the prospect of a decline in FDI and of restricted access to wholesale funds for Gulf banks if liquidity dries up Forecasts already suggest a contraction of inflows to the region Example: projected FDI into Saudi Arabia for 2012 is just $5.5 billion, down from $38.1 billion in 2008

6 The Eurozone Crisis The exchange rate channel has proved to be a silver lining Gulf currencies pegged to the dollar have risen against both the euro and the pound sterling This makes European imports cheaper and exerts a welcomed downward pressure on infla<on FX Rate past 180 days Exchange Rate (weekly) USD/EUR USD/GBP

7 Conclusion The Eurozone Crisis The importance of these three effects varies widely across the GCC In some countries, conditions have mitigated the adverse effects of the crisis Examples: Saudi Arabia s reliance on European imports, for example, has enabled the country to benefit from the euro s depreciation, as this has relieved inflationary pressure Dubai is highly vulnerable to a sharp increase in borrowing costs given its ongoing need to refinance $10 billion in government debt.

8 The Arab Spring The short-term effect of the Arab Spring on GCC economies has been positive due to increasing oil prices The main concern here stems from the GCC s response to political and social unrest in the region This has taken the form of huge domestic social spending pledges amounting to an estimated $150 billion or 12.8% of GDP in the GCC The political implications of the Arab Spring tend to be more controversial

9 The Arab Spring Increase in government expenditure was focused in the areas of education, healthcare, housing subsidies and other social welfare packages Increase estimated at around 15% of GDP in Saudi Arabia, 0.5% in the UAE, 1.5% in Bahrain, 2.5% in Kuwait, and 1.25% in Oman

10 The Arab Spring In Saudi Arabia alone, the government decreed a 19% increase in the salaries of government employees in addition to a 2 month salary bonus The UAE witnessed a 70% increase in pensions for military personnel Bahrain provided a direct cash transfer of $2660 to each household in addition to free staple food and cash transfers in Kuwait. Oman recently established an unemployment benefit of $390 per month

11 The Arab Spring The question is: How sustainable are these social expenditures and for how long will they serve as a buffer from popular demands of reform and democratization? Recent evidence has shown that commitments to increased social expenditure have been coupled with an increased crackdown on freedom of expression and organizations of the civil society

12 The Arab Spring Thus far the behavior of the GCC governments regarding the Arab Spring is in line with an authoritarian bargain But does this bargain hold with the advent of the Arab Spring? The expectations of the new generation of middle class citizens in the region are more critical of their oppressive regimes.

13 The Arab Spring One thing is for sure, the dangerous economic ramifications of spending Expansions of social welfare schemes tend to be politically difficult to reverse, and these new spending programs may become unsustainable should oil prices decline huge expenditures will contribute to inflationary pressure, risking a return to the excessively high rates that the region registered in 2008 The composi<on of this social spending further distorts the structure of GCC economies since it suppresses the role of the private sector

14 The Arab Spring The GCC states have also pledged aid to Jordan and Morocco as part of a five-year development plan for each country Unlike indiscriminate public sector pay hikes, however, investing in neighboring economies by the GCC is a policy with the potential for significant economic returns insofar as it facilitates mutually beneficial regional trade

15 Conclusion The GCC has so far been able to maneuver through the challenges presented by both the eurozone crisis and the Arab Spring But these epochal events remind the region of the need to confront four tough long-term challenges 1. Diversification away from the oil and gas sectors 2. The viability of the authoritarian bargain model in light of increased demands for reform

16 Conclusion 3. The GCC s geographic diversification in terms of trade relations 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Value of Trade as a % of Total with GCC China India Emerging & Developing countries Europe

17 Conclusion 4. Rebuilding the foundations of enhanced economic intergration The events of the Arab Spring have led the GCC to consciously forge closer <es with Jordan and Morocco This development suggests that closer economic integration, at least at the sub-regional level, might be a key policy focus in the upcoming years

18 Conclusion 4. Rebuilding the foundations of enhanced economic integration The events of the Arab Spring have led the GCC to consciously forge closer <es with Jordan and Morocco This development suggests that closer economic integration, at least at the sub-regional level, might be a key policy focus in the upcoming years So far, the GCC has not reacted with a decisive stance on any of these issues Clearer strategies are required to address these issues

19 Thank You