Gulf Arab monarchies are gearing up for a prolonged period of low oil prices and pushing through reforms that are more ambitious than the last time crude slumped in the 1980s, according to investment bank Renaissance Capital.
“We think the Gulf is acting in a much more vigorous and far reaching way than was the case the last time oil prices collapsed,” Renaissance analysts Charles Robertson and Vikram Lopez wrote in a report published Thursday. “A key question is whether reform is more credible now than it was in the 1980s? The answer, we think, is yes.”
The six countries that make up the Gulf Cooperation Council face a combined budget deficit of 12.3 percent of economic output this year, according to International Monetary Fund projections, and have introduced cost-saving programs that include lowering or removing subsidies and plans for value added taxation. Saudi Arabia’s break-even oil price has fallen to $67 this year from $106 in 2014, the IMF estimates.
There’s a significant difference with the reforms of the 1980s, which were “modest and late” and left Gulf economies still too dependent on state spending and with rigid labor markets, according to Renaissance Capital. Subsidies in Saudi Arabia surged to 68 percent of oil revenue in 1984 from 4 percent in 1975, the report said.
“Some reform did happen then but from a poor base – when human capital was under-developed, governments believed they should maintain a strong role in the economy and basic economic principles were ignored for political reasons,” Renaissance said in the report.
Some economists, however, are skeptical of the reform drive and argue that private sector businesses won’t be strong enough to pick up the slack from falling oil revenues. The IMF predicts non-oil real GDP growth to fall to 2.5 percent this year, from 6.3 percent as recently as 2013.
“We would caution against getting carried away,” Capital Economics said of Saudi Arabia’s plan in an e-mailed research note on Thursday. “The authorities have made considerable progress in tightening fiscal policy, but there is little sign of a clear path for weaning the economy off oil, let alone tackling the vested interests that may scupper reform.”
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