Issue Four

IN THIS ISSUE

In the last quarter of 2017, West Asian and North African (WANA) countries continued to strive for diversification and sustainability while dealing with increasing tensions and changing social contracts. In Trends, we look at changes to Saudi Arabia’s line of succession at a time when the kingdom faces challenges on social and economic reform, evaluate the future of the Gulf, and discuss tentative ceasefires in Syria and Libya. In Countries, we take a closer at Iraq post-ISIS, and Oman’s continued economic downturn. Finally, our Deep Dive focuses on the impact of the OPEC deal.

Trends

A shift in Saudi Arabia’s line of succession paves the way for a younger generation, including Crown Prince Mohamed bin Salman, to serve as future leaders of the kingdom, helping it through a challenging period of social and economic reform. At the same time, the future of the Gulf remains in question as the Qatar dispute continues with no resolution in sight. However, the US appears content to allow regional events to play out, having reducing its commitments with the exception of counter-terrorism efforts. Elsewhere, though tentative ceasefires have reduced violence in Syria and, hopefully, Libya, long-term resolutions remain elusive and the cost of reconstruction in the region will pose a serious challenge.

Countries

Three years after ISIS took control of much of northern and western Iraq, the government successfully pushed the terror group out of most urban centres. Iraq, however, continues to be plagued by corruption and political division. The post-ISIS era will see elections in 2018 and reconstruction efforts in the face of continued internal challenges. Oman has maintained neutrality in the Qatar crisis but faces financial troubles, which may make it susceptible to political pressure. Because while its economy remains dependent on oil, and diversification efforts struggle under the burden of bureaucracy, Oman’s internal stability and external policies are at risk.

Deep Dives

Though OPEC countries have increased efforts to salvage global oil prices, declining oil revenues have impacted WANA’s oil exporters – contributing to lower growth rates and forcing GCC countries to rethink their social contracts. So, while the OPEC deal appears to have led to oil prices staying above $40, a lack of consistency makes any future effectiveness uncertain.

The Evolution of the Gulf and Shifting Conflicts

Succession in Saudi Arabia

The appointment of Mohamed bin Salman as crown prince of Saudi Arabia on June 21, 2017 signalled a shift to a younger generation of leaders. The 32-year-old replaced his cousin, Mohamed bin Nayef, who was seen as part of the ‘old guard’ of more traditional, conservative Saudi leadership. Salman, for his part, has been described as a reformer, part of a younger generation willing to adopt controversial reforms and a more modernist stance for the kingdom. Other young royals have followed suit with their own political elevations: His brother Prince Khaled bin Salman, reportedly in his 20s, was recently appointed US ambassador, while 33-year-old Prince Abdulaziz bin Nayef, eldest son of the Eastern Province governor, is the latest head of the Interior Ministry.

Establishing a line of succession with someone in his early 30s can be seen as a step towards ensuring long-term continuity of rule instead of frequently dealing with the family dynamics of succession among older relatives who would likely serve shorter reigns as king. This dynamic is not only true of Saudi Arabia: Salman is considered to be close to his Emirati counterpart, Crown Prince of Abu Dhabi Mohamed bin Zayed, reinforcing the close working relationship between the next generation of rulers in both countries.

Salman’s appointment doubles down on the various new paths he has created for the country. Regionally, he has aggressively staked out Saudi Arabia’s position and is seen as a leading force behind both the Saudi-led coalition’s intervention in Yemen and the Arab quartet’s diplomatic moves against Qatar. At the same time, however, he has changed course on Iraq, signalling a possible rapprochement by welcoming a visit by Shiite cleric Muqtada Al Sadr. Domestically, he is the leading force behind Saudi Vision 2030, has introduced several aggressive economic reforms, plans to open up tourism, has created an entertainment authority, and has changed regulations on company ownership to promote investment. A proposed initial public offering of Saudi Aramco, which would privatise a small portion of the kingdom’s largest business, is yet another significant move, but much depends on its success.

The selection of Salman as crown prince can be seen as a play to stake Saudi Arabia’s future on technology, innovation, and reform, and to empower a leader who will attempt to carry out a challenging agenda to drive the country’s future economic success.







The GCC bends
Since the outset of the Qatar crisis, which began in June, neither Qatar nor the "anti-terror quartet" of Saudi Arabia, the UAE, Bahrain, and Egypt have moved far from their initial stance. Indeed, the former has doubled down on its relationship with Iran by moving to restore diplomatic relations, while its Arab critics have not moved beyond their demands linked to efforts to impose an economic boycott, which UAE Ambassador to the US Yousef Al Otaiba has referred to as necessary protection from Qatar’s threat to the region. Attempts to ameliorate the situation, such as Saudi Arabia allowing Qatari pilgrims across the border, have only inflamed matters: The agreement for Hajj travel was made with Sheikh Abdullah Al Thani, a member of the Qatari royal family seen as a potential rival to the emir.

Qatar does not yet have much incentive to shift its position, with natural gas sales currently stable and trade making a recovery as sea and air routes are partially restored. However, a downgrading of its credit rating to AA- is likely to raise long-term borrowing costs. As of early August, rumours floated that Qatar might be expelled from the GCC as a result of its unco-operative stance, or that it may choose to quit the alliance, which Defence Minister Khalid Al Attiyah said had been “jeopardised” by the dispute. Elsewhere, a Bahraini minister recently accused Qatari media of “inciting” its citizens against the GCC, while Al Otaiba suggested in an interview some disputes end in “divorce”. However, no moves to this effect have taken place.

Instead of expelling Qatar from the GCC, the country may simply take on a role of lesser importance within the bloc. Qatar has long endured differences of opinion from its GCC neighbours. What has already occurred is the tightening of bilateral relations among more like-minded Gulf countries. In the near to mid-term, the stalemate between Qatar and its rivals sets aside any discussions of a unified Gulf military body, challenges attempts to integrate regional defence networks such as missile defence systems, and raises questions about the sustainability of common customs and duties laws.

US takes a light touch in the region
The US, after an initially confused response from US President Donald Trump and his diplomatic and military envoys, has taken a light touch on the dispute, with US Secretary of State Rex Tillerson making one trip to the region in July and hosting foreign ministers from the countries involved in Washington, DC. This effort, however, is largely towards encouraging the parties to work under a Kuwaiti mediation framework. Despite the significance of Al Udeid military base, in Qatar, to the US anti-ISIS efforts, the Washington has demonstrated reduced involvement in the region and a preference for its allies to resolve the situation on their own.


US Secretary of State Rex Tillerson and Saudi Foreign Minister Adel Al Jubeir address reporters in Washington, DC, on March 23, 2017. US Department of State/Flickr Public Domain


At the same time, the US has increased sanctions on Iran in retaliation for Iranian ballistic missile tests and suggested it wants to step away from the P5+1 nuclear deal. In the meantime, it has increased pressure for further inspections of nuclear facilities, a step which the UN rejected. In proposing breaking the deal, however, the US is likely to stand alone. European countries are unlikely to follow suit, with France’s Emmanuel Macron stating there is “no alternative”.

The US has downplayed expectations in other areas as well, ending its support for anti-Assad rebels in Syria in place of continued support for joint Arab-Kurdish anti-ISIS forces pushing towards Raqqa. Moreover, once the fight for ISIS-controlled areas ends, US anti-ISIS Envoy Brett McGurk has said the US will not “foot the bill” for long-term reconstruction, emphasising the global nature of the problem.

Rebuilding Syria and Northern Iraq
The war against ISIS in Mosul, Raqqa, and elsewhere has resulted in their near-total destruction. As fighting winds down, additional work is required to estimate reconstruction needs, likely to cost hundreds of billions of dollars. For Syria, the World Bank has suggested $200bn, though this figure could reach tens of billions of dollars more; meanwhile, the Iraqi government has proposed a $100bn, 10-year plan for reconstruction and reconciliation. A UN official estimated $1bn was required just to repair Mosul’s basic infrastructure. Some countries, including the UAE, have pledged funds for reconstruction, and Saudi Arabia is in talks to financially support reconstruction efforts as part of a broader plan to pry Iraq away from Iranian influence.

Long-term implementation of these commitments will be critical to preventing the resurgence of ISIS.


Iraqi Security Forces walk alongside buildings in Mosul’s Old City, which was destroyed during fighting with ISIS. July 10, 2017. Thaier Al Sudani/Reuters/phocal Media


Tentative ceasefires
As the conflict in Syria drags on, it has become increasingly apparent there will be no decisive conclusion. Rather, the conflict has wound down in so-called de-escalation zones through a series of temporary, localised ceasefires. Negotiated with the backing of Russia, Iran, and Turkey, these ceasefires have successfully reduced nationwide violence – despite sporadic breaches – and concentrated remaining anti-Assad forces primarily in northern Syria and Idlib. This de-escalation is expected to continue through the Geneva and Astana processes but faces the challenge of a heavily divided anti-Assad opposition.

A major risk is what comes after. Syria has used temporary ceasefires to redirect its forces into anti-ISIS fights in eastern Syria, including recapturing the town of Sukhna. As that process and the battle for Raqqa continue, there is the very real prospect the Assad government will turn the full force of its undistracted military against remaining pockets of rebels.

Libya has also seen a tentative ceasefire as a cause for hope in resolving its long-running conflict. A July 25, 2017 meeting in Paris between Fayez Serraj, head of the UN-backed Government of National Accord, and Khalifa Haftar, head of the Libyan National Army, resulted in a verbal agreement for a ceasefire and elections in 2018. The challenge now is to turn those words into a concrete roadmap.

Just as in Syria, the plethora of combatants makes the conclusion of any national political agreement highly challenging. And fighting has not stopped – the Paris agreement excluded extremist militants who remain active around Tripoli, Misrata, and Sirte, and the Libyan National Army continues its siege of Derna. This incremental approach, producing smaller agreements that can then be built upon, is not a new tactic. There has been talk of localised ceasefires in Syria for years. Now, however, it is bearing fruit: Populations and combatants worn down by years of fighting may have additional motivation to make such agreements work.

As a new generation looks to eventually take the reins in Saudi Arabia and the UAE, these countries will have a leadership role to play in the region, especially as the US steps back. With fighting in Syria, Iraq, Libya, and Yemen winding down, ceasefires can create areas where the hard but necessary work of rebuilding local economies can begin. The process and funding of this post-conflict reconstruction and, significantly, reconciliation, will have a major impact on the future shape of these countries and region as a whole.

Iraq continues to be plagued by political division, corruption, and a lack of economic diversification – on top of the continued threat of terrorism. In Oman, a financial predicament continues and the risks to its internal and external policies have begun to surface.

Iraq

ISIS: What will emerge from the ashes of Mosul?

Having been expelled from Mosul, ISIS will likely devolve into a classic insurgency, retaining capacity for continued terror attacks and the safeguarding of some of its base support. But the recent success of the Iraqi Security Forces (ISF) in driving the group out of Mosul will both significantly reduce its ability to launch further operations and prevent it from capturing territory in the north. ISIS does, however, have the power to continue carrying out attacks in Baghdad and other parts of the country. This is especially true where it maintains nominal support or territorial control, such as Hawija, in central Iraq.

Reconstruction: Strings attached
Although reconstruction efforts are underway, corruption and improper planning will scare off foreign investors. Nevertheless, following the government’s recapture of Mosul and other locations across the north and west, steps have been taken to secure international funding, which officials estimate will cost $100bn.

But foreign investors are reluctant to engage with the vague business proposals they are being presented with for fear such contracts would either generate a low return on investment or allow local officials to syphon funds. This reticence is not without warrant: Years of government corruption has seen members of Iraq’s ruling elite pay local and provincial officials in return for their support.

In addition to holding back the country’s economic revival, corruption has both exacerbated and highlighted fundamental security concerns, with $500m-600m being paid to 'ghost soldiers'. This alone was considered one of the main factors behind the ISF’s collapse and eventual retreat from Mosul in 2014 following the invasion by ISIS.

Mosul in the middle
The battle for Mosul saw unusual co-ordination between the ISF and Kurdish Peshmerga, with Baghdad and Erbil officials describing such activity as "historic and unprecedented". But pleasantries in the field are not expected to spill over into politics. Indeed, this co-ordination is already being challenged by the revival of contentious and polarising issues such as the Kurdish independence referendum.


Iraqi Prime Minister Haider Al Abadi congratulates members of the Iraqi Security Forces following their victory in Mosul. July 9, 2017. Iraqi Prime Minister's Media Office/Reuters/phocal Media


Instability after the Kurdish referendum for independence, held on September 25, is the largest threat to Iraqi sovereignty since ISIS invaded. Over the past decade, the Kurdistan Regional Government (KRG) has several times expressed its desire to secede, with the referendum held to placate an increasingly vocal Kurdish populace. Erbil has also accused Baghdad of not being in control of the country and of neglecting the KRG by refusing to pay the 17% of national budget revenues allotted for Erbil. The central province, a longtime hotbed for ethnic tension, is home to vast oil reserves and is important to the Kurdish narrative.

However, KRG President Masoud Barzani faces internal criticism for fiscal policies that have plunged the Kurdish region into an economic crisis.

Although Barzani, also leader of the ruling Kurdistan Democratic Party, initially said the authority would postpone the referendum in exchange for political and economic concessions, those attempts failed. Turnout was estimated at 79%, according to the electoral commission, and unofficial results show more than 90% voted for independence.

While some critics have called for an armed response, Iraqi Prime Minister Hyder Al Abadi said the government will not hold talks about the results of Monday’s secession vote, adding that “those who were responsible for the unconstitutional referendum would be duly punished”.

The KRG faces important regional and international opposition to its claims for autonomy, with Iran and Turkey standing out as major opponents due to fears independence will galvanise their own Kurdish populations. From Istanbul, Turkey's President Recep Tayyip Erdogan described the vote as "unacceptable" and threatened to close an oil export pipeline vital to the Iraqi Kurds and stop commercial crossings between the two parties. Elsewhere, Tehran called the vote "illegal", banning flights to and from the Kurdish region.

The rest of the international community received the news with unease. The US said it was “deeply disappointed” by the “unilateral” independence referendum, while UN Secretary General Antonio Guterres also expressed concern over its impact. In all, Barzani and the Kurds will face huge obstacles in moving their political roadmap forward. The question is whether this widespread condemnation will foster political unity or provoke dangerous divisions in Erbil.

2018: Election year
As Iraq begins to acclimatise to a post-ISIS era, jockeying among the country’s key political players has resulted in unexpected meetings with regional states. Influential Shiite cleric Muqtada Al Sadr, who leads the Sadrist Movement, recently travelled to Saudi Arabia and other Gulf countries in an attempt to develop closer relations ahead of the elections. Sadr looks to isolate his rival, former Prime Minister Nouri Al Maliki, by engaging with anti-Maliki Gulf states. Sadr has also formed an alliance with Al Wataniya, made up of Sunni politicians, with a view to build a coalition that can be backed by Saudi Arabia. In return, the cleric hopes to expand the Sadrist Movement’s support base and increase its chances of taking control. To this end, the kingdom has stated its desire to establish closer economic relations with Iraq by opening the land border between the countries, establishing a consulate in Najaf, and assisting in the reconstruction of Mosul.


Iraqi Shiite cleric Muqtada Al Sadr meets with Saudi Crown Prince Mohamed bin Salman in Riyadh on August 16, 2017. Bandar Algaloud/Reuters/phocal Media


Oil floats to the top
Despite low oil prices, diversification efforts, and a commitment to reduce output under the OPEC deal, Iraq remains reliant on oil to fund massive reconstruction plans and short-term economic growth. And so, in direct contradiction to the deal, Iraq has plans to open oil fields and increase daily output to about 5m barrels per day. Iraq is OPEC’s second-largest producer and home to the world’s fourth-largest proven reserves. But considering the litany of political and security issues officials are dealing with, Iraq is far from able to consider its long-term economic sustainability.


Oil Production in Iraq, 2012-17 (m/bpd)

Source: OPEC, 2017


Conclusion
Iraq may have significantly reduced ISIS’s grip over large swathes of the country, but there are other struggles it continues to face, from potential terror attacks, political division, and corruption, to Kurdish secession efforts and a continued lack of success in diversifying its economy.

Oman

Oman’s financial predicament

As the Qatar crisis drags on, Oman’s neutral stance in the stand-off has attracted little attention. Although it has benefitted economically from the blockade, with container and air traffic bound to Qatar rerouting through Oman, it has kept a low profile. However, Oman’s ability to maintain internal stability and resist external GCC pressure on regional issues has been weakened due to a dramatic three-year economic downturn – circumstances it has found difficult to swallow after a decade of strong growth.

Oman’s predicament was politely highlighted by the IMF in May 2017 following a routine annual visit. The world body predicted that Oman’s budget deficit would widen in 2016 to 22% of GDP, growth would be flat in 2017, inflation would significantly increase, and prevention of further deterioration in the deficit was dependent on in-year tax increases, which have not been implemented four months after being announced. On July 28, Moody’s downgraded the country’s long-term bond ratings from Baa1 to Baa2 and changed its outlook from stable to negative, with the key driver being the lack of progress in addressing structural vulnerabilities and the government’s inability to address large fiscal and external imbalances.

Some Omanis are sceptical that plans will materialise based on the government’s inaction over the last two years. Since 2015, the Ministry of Finance has consistently overestimated projected revenues and failed to reduce expenditure such that the variance between the planned and actual budget deficit was 85% in 2015 and 52% in 2016. There is apprehension, therefore, about plans to reduce the 2016 budget deficit of OMR5.3bn to OMR3bn (12% of GDP) by the end of 2017.


Oman’s Current Account Balance vs the UAE and Qatar, 2014-17 (% of GDP)

Source: IMF, 2017


The status of diversification efforts
The economy still remains dependent on oil revenues, with efforts to expand outside the sector having thus far failed. In its diversification pursuits, investment using funds collected over the golden years when oil prices were high have hitherto focused on large-scale, long-term projects both at home – such as Salalah and Duqm ports and the petrochemical facilities at Sohar – and abroad, such as ownership of Oxea. In time, these megaprojects may create trickle-down benefits for the local economy and for small- and medium-sized enterprises (SMEs), but they are unlikely to have a major impact on the labour market or fiscal situation in the short term and could require further capital investment. The Tanfeedh initiative, which supports SMEs, remains in the planning phase and, in any case, its budding entrepreneurs would need to succeed in a difficult market before being in a position to pay taxes and contribute non-oil revenue to the government. In the meantime, SMEs struggle with the burden of bureaucracy, Omanisation costs, and market dominance of entrenched trading houses. Entrepreneurs seeking a friendlier business environment migrate to the UAE.


Model of Al Duqm Port and Drydock. February 23, 2013. Wikimedia


Surveying the macroeconomic scene, it is difficult to see where salvation may come from. Though the sultan replaced the Central Bank governor, who had been in office for 26 years, in early September and restructured the board, it faces major hurdles. First, interest rates, which must be paid to cover the fiscal deficit, look set to rise along with global interest rates. Rates have also been affected as a result of rating agencies’ noting the additional risk of lending to an Omani economy that is stalled and draining its reserves. Second, the latest government development bonds, offered in September 2017, are priced at 5.7% compared to similar bond issues priced at 3% in 2013-14. Third, with the private sector struggling to stay afloat, staff are being laid off – only to join a labour market already swollen with new entrants. Fourth, Oman no longer receives subsidies from other GCC countries. Last but not least, with the Khazaan gas project completed, oil and gas production is set to grow following record levels in 2016, but revenue is still falling, restrained by OPEC production cuts and depressed oil prices. Attempts to redress lower revenues by increasing taxes in the non-oil and gas sector run the risk of choking growth. For now, the government has not yet found a way to nurture the private sector and encourage enterprise and diversification.

Risks to internal stability and external policies
Under different circumstances, Oman might be able to ask the GCC for additional assistance, allowing it to ensure internal stability and buy time to pursue its diversification programme. Yet, Saudi Arabia and the UAE are also struggling to tighten their financial belts, and an economic helping hand might come with added political pressure: Countries handing out loans could reasonably expect greater solidarity from Oman on Yemen, Iran, and Qatar. Oman is unable to provide on any of the three.

With regard to returning stability to Yemen, Oman has a different viewpoint to the rest of the GCC in part because it remembers the cost of re-establishing the integrity of its border with Yemen during the Dhofar War of the 1970s. Oman will likely not compromise or become directly involved in the war as a matter of national survival, knowing the consequences of doing so could be severe.

Oman’s historical relationship with Iran differs from that of other GCC states as well. Unlike its neighbours, Oman’s Shiite minority is neither ethnically or by Shiite tradition linked to Iran, being primarily of Sindh origin. In addition to its policy of maintaining good relations with all its neighbours, Oman has sided with Iran by virtue of their shared control of the Strait of Hormuz and Bukha oilfield. Moreover, Sultan Qaboos has not forgotten the sacrifices Iranian soldiers made in defending the sultanate during the Dhofar War. As a result, Oman is unlikely to forego its trade links with Iran or the several joint petrochemical projects on the horizon.

In addition, Oman is likely reluctant to wade into the political and security issues the rest of the GCC has raised with Qatar and sees further vulnerability in departing from its version of political neutrality. Notably, in a detail likely noted by Saudi Arabia and the UAE, the country has not specifically championed Qatar. Oman will likely allow Kuwait to continue taking the lead. However, it could serve as a useful conduit for talks between both sides, if needed.

As Yemen, Iran, and Qatar preoccupy the minds of other GCC leaders, Omanis are focused on the likelihood of further economic deterioration – and the social unrest and security risks that may follow – at a time when the sultan’s health and age are of concern. The sultan’s decision to remain not only neutral but low profile in recent political dustups highlights his focus on internal economic woes. Oman, which has always been economically more vulnerable than its neighbours due to lower oil reserves, understands such vulnerability is a risk to its internal stability as well as its external policy of neutrality. Indeed, political stability in Oman is critical to all Gulf states, particularly Saudi Arabia and the UAE, and thus the GCC may find it in its best interest to nudge Oman along the road to economic recovery rather than pressure it to change its foreign policy positions.


US President Donald Trump speaks to Oman’s Deputy Prime Minister Fahd Al Said at the Riyadh summit on May 21, 2017. Jonathan Ernst/Reuters/phocal Media

In our fourth deep dive, we take a look at OPEC efforts in a low-priced oil environment. Although it is too soon to make a full assessment of the impact on WANA economies, early indications are starting to appear. Some efforts are successful, and others are burdened with public pressure.

Is the OPEC Deal Working for Regional Oil Exporters?

OPEC efforts in the face of a low-price environment

Regardless of OPEC’s efforts to salvage global oil prices, a low-price environment is both a stark reminder of the urgency to move beyond oil and an opportunity to implement necessary economic reforms. With this in mind, WANA’s oil exporters need to accelerate their transitions towards more diversified economies.

Declining oil revenues have affected the economies of regional oil exporters in two distinct ways: On one hand, they have contributed to lower growth rates, created or widened fiscal deficits, and even forced GCC countries to tap into debt markets. On the other hand, they have instigated states to rethink their social contracts, prompting restrictions on public spending.

It was in 2014 when, driven by Saudi Arabia’s interest in putting pressure on US shale companies, oil supply first exceeded demand, despite resistance from other OPEC members with lower tolerance thresholds. This policy gradually created a glut that triggered prices to collapse to as low as $30 per barrel. At the time, it seemed Saudi Arabia was prepared to tolerate lower oil revenues in the short term in exchange for inflicting damage on a new and rising rival.

One can argue OPEC’s policy to maintain down pressure on oil prices backfired, after it was forced to reconsider its demands in light of shale producers adapting to the deal by lowering costs and improving their productivity. As a result, last December saw the cartel strike a deal with 11 non-members, including Russia, to cut production.

So far, the deal is working in terms of keeping prices higher than the nightmarish below $40 a barrel. Rebalancing the market, however, seems to be especially challenging due to rising output from exempt producers (Libya and Nigeria), non-compliance of members and non-members alike, and additional supply coming from US shale producers. Market adjustment is likely to take much longer than expected, if at all.


Saudi Arabia's Energy Minister and OPEC conference president Khalid Al Falih attends a meeting of OPEC and non-OPEC producing countries in Vienna on May 25, 2017. Leonhard Foeger/Reuters/phocal Media


Economic impact
It is premature to make a full assessment of the impact on WANA economies. Nevertheless, one can see early indications of improved liquidity in oil-producing countries due to stabilised prices, thereby allowing GCC governments to inject cash into their economies and stimulate growth in the non-oil private sector. Saudi Arabia, however, started this process before the deal, with the aim of shifting jobs from fiscally constrained public institutions to the private sector.

As shown below, regional oil producers have taken measures to constrict expenditure, steadily lowering fiscal break-even oil prices. However, it should be noted some of the decrease in non-GCC countries could be attributed to increased production. Oil prices are expected to remain below the $60 mark in the medium term, paving the way for further reduction of subsidies and/or the introduction of new taxes.


Break-Even Oil Prices for WANA Exporters, 2014-18 ($)

Source: World Bank, 2017


Saudi Arabia: Moving beyond oil needs oil’s money
Despite serious attempts to reduce public spending, the kingdom’s willingness to accept oil production cuts signals it knows its fiscal consolidation measures will not replenish the budget deficit anytime soon. Saudi Arabia’s economic diversification agenda is perhaps timelier than ever; however, it is strongly reliant on boosting its fiscal balance. Plans to shift from oil require high levels of 'smart' spending – driven by oil revenue.

Emphasis on increasing 'local content', as laid out in Saudi Vision 2030, opens opportunities for further growth in the private sector. The issue, however, is whether the kingdom will be able to provide the human capital and resources required of the proposed plans.

Another potentially contributing factor to the kingdom’s interest in enhancing global oil market prospects is the upcoming partial initial public offering of Saudi Aramco, even if it comes at the expense of ceding market share in the short term.

UAE: Economic diversification is paying off
In the UAE, reduced oil revenues have contributed to expected limited growth of 2% in 2017. But low prices have allowed the government to trigger reforms, including raising electricity and water tariffs and cutting gas subsidies. The country has been better at withstanding the financial impacts of low oil prices than its neighbours due to bolder reforms and a relatively diversified economy. Moreover, the UAE is also experiencing a faster rate of expansion in its non-oil sectors than previously witnessed. However, long-term growth will eventually depend on levels of liquidity, foreign investments, and trade – particularly with Iran.

Iran: Nuclear sanctions are gone, but not forgotten
Recently, and off the back of the removal of nuclear sanctions in July 2015, Iran secured a $5bn gas deal with Total. Consequently, the country was exempt from the OPEC deal to help it regain lost market share.

Iran’s major challenge, however, is accessing capital and attracting foreign investment in non-oil sectors. Despite the P5+1 deal, Iran-US relations have not necessarily improved, and concerns over a potential renewed standoff seem especially forthcoming under the Trump administration. Moreover, recent US sanctions imposed as a response to its ballistic missile programme have added further uncertainty to Iran’s ability to capitalise on its oil production allowance.


Visitors walk past Total’s stand at the annual International Oil, Gas, and Petrochemical Exhibition in Tehran. April 21, 2009. Morteza Nikoubazi/Reuters/phocal Media


Timing matters: Oil prices, reforms, and public pressure
Although economic reforms implemented across the GCC have not been uniform, they all point in the same direction: That the political economies of Gulf states are undergoing serious revisions. Despite the implicit social contract between each set of rulers and their citizens, both sets are now more aware that the rentier economy is unsustainable.

Such awareness is key for creating better understanding of austerity measures taken by GCC governments. But lifting subsidies without proper assessment of their economic impact, particularly on vulnerable members of society, would not be viewed favourably by the public.

Following the OPEC deal, Saudi Arabia decided to reinstate financial allowances for civil servants and military personnel due to “better-than-expected” budget revenues. Economically speaking, this may prove costly, but it appears to have served a far-reaching goal of reducing public pressure, particularly during a time of political transition.

Prospects
Although the deal has resulted in oil prices staying above the $40 mark, its future effectiveness is in question. Increased productivity, reduced regulations, and lower costs mean the US shale industry is here to stay. Coupled with a short investment cycle, shale could disrupt market dynamics, dampening price hikes much sooner than expected and narrowing the window of fiscal surplus from WANA exporters.

The OPEC deal also appears inconsistent. According to an International Energy Agency report from June, one quarter of member countries had failed to comply with measures – a new low. It was even weaker for non-OPEC producers, with a 33% non-compliance rate. In addition, earlier this year Iran announced its intent to increase crude oil production by 3m barrels per day. It is not clear yet, however, the pace at which Iran means to increase production, although one can foresee that such a step might complicate OPEC’s co-ordination efforts.

Postscript


In a region weighed down by uncertainty and conflict, it is difficult to find a silver lining. In Saudi Arabia, as the ‘new guard’ of young and visionary leaders attempt to introduce societal and economic changes, what friction points will surface, and how will they be overcome? Conflicts in Syria, Libya, and Iraq are entering a critical moment where peace or, at the very least, a certain calm seems attainable, but for how long? And who – or what – will follow ISIS? In the the Gulf and elsewhere, diversification and revenue generation is an arduous process. How will the more vulnerable of these economies sustain continued pressure on coffers while maintaining peace?

In this year's final issue of WANA Quarterly, we recognise many of the issues that have plagued the region this past year will continue to be thorns in its side. Countering extremism, battling war and inequality, and managing economic diversification have been central themes across all four of our issues because they are real predicaments in the region. The hope is these struggles remain short term and lead, ultimately, to sustainable advancement across the region.

Research for the report concluded on September 26, 2017.