Gulf grapples with ‘silent’ economic crisis
An uptick in oil and gas prices may not trickle down soon enough for businesses and employees to keep above water
Nosing through the traffic on Dubai’s Sheikh Zayed Road, Kasir, a taxi driver from Kerala now in his second year in the United Arab Emirates, shakes his head despairingly when he thinks of the dream that first brought him there.
“They said, you come here, you’ll make a lot of money,” he recalled, reluctant to give his full name, given that talk of economic problems is highly sensitive.
“But it’s not true. It’s a hard life, working all the time, and then at the end, after you spend on rent, on food, on fuel and give the taxi company its share, you have nothing left,” Kasir said.
He is not alone in feeling the pinch these days, with residents and businesses across the Gulf seeing budgets tighten and numbers fall, as a combination of sustained low oil and gas prices and a jumping cost of living hit pockets.
Economic growth has slowed or stopped, public debt has been rising and political uncertainty has been clouding the future, with conflict, sanctions and blockades disrupting regional businesses.
The hope now is that the recent uptick in oil and gas prices, along with government stimulus programs, will ease the pain. Yet for some – particularly those in the Gulf’s squeezed middle classes – such forecasts seem yet to have much impact on everyday lives.
After years of strong economic growth, fueled by high oil and gas prices and massive government-funded infrastructure projects, most of the economies of the six-member Gulf Cooperation Council (GCC) began to slow back in 2014.
That year, oil and gas prices slumped, from around $114 a barrel in the summer of 2014 to about $60 a year later – and a final low of less than $30 in early 2016. With all the GCC economies highly reliant on revenues from oil and gas to fund their states, such a slump had major repercussions.
In the United Arab Emirates, GDP growth went from 3.8% in 2015 to only 0.8% in 2017, according to official preliminary figures. Saudi Arabia and Kuwait moved into recession, the first seeing its economy shrink by 0.7% last year and the latter, by 2.9%.
With such drastic reductions in revenue, governments also began borrowing more heavily, with public debt rising across the GCC.
This has impacted Bahrain and Oman most of all, with debt now approaching 100% of GDP in Bahrain, while in Oman, the ratio of debt to GDP went from about 5% to more than 40% between 2014 and 2017.
On the ground, these numbers have translated into headlines.
The ‘silent crisis’
Major layoffs started soon after 2015, with major and minor employers shedding jobs.
The Abu Dhabi National Oil Company, for example, had shed about 10% of its staff by the end of 2016, while Abu Dhabi National Energy Co cut its numbers by a quarter in the two years after 2014. Iconic companies, such as Qatar’s Al Jazeera TV, also slashed numbers, with 500 – about 15% of the workforce – laid off in 2016 alone.
The cuts continued in 2017, too. That year, the number of people employed in banking in Abu Dhabi, for example, went down by about 10% compared to 2016.
Most of those made redundant were non-natives, as the GCC states all have large percentages of expats working in them. In Dubai, for example, some 90% of its 3.1 million population are foreigners, according to the official Dubai Statistics Center.
For many, losing a job also means leaving the country. This has had an impact on real estate – one of the major pillars of many Gulf countries’ non-oil and gas income – with demand for homes falling, just as a major pipeline of real estate construction projects began to deliver.
“In the UAE, there has been a major increase in the supply of residential real estate in recent times,” said Yasemin Engin from Capital Economics in London.
“Rental prices have fallen as well as purchase prices, causing concern,” she told Asia Times.
This is because those who invested in these schemes have often had to accept much lower rents and sale prices than they had bargained for, further squeezing their finances. Major property developers have thus seen profits tumble.
Dubai’s DAMAC, for example, announced this month that its second-quarter 2018 profits were down 46% year-on-year, while fellow developer Nakheel saw its profits dip 3.8% in the first six months of this year.
Companies have also downsized, reducing demand for offices and office space, while some have also gone bust. One of the most recent was Dubai-based private equity firm Abraaj Capital Ltd, for which liquidators were appointed mid-August.
In private, business owners and residents suggest retail has also felt the pinch. The number of shoppers has dropped off, and those who do head to the mall are much more price conscious.
In Dubai, tourism is a major draw – yet over-supply in the hotels market, combined with a push for lower-spending mass tourism – has also hit the profitability of tourism businesses, even when hotels are filling rooms.
“The competition is now so cut-throat, some hotels are even charging less than break-even in order to just stay in the game,” one Indian hotel owner said, not wanting to be named, given a general fear in the emirate on speaking out about the economy – and leading many to dub this the “silent crisis.”
Meanwhile, the overall cost of living has been rising, despite falling rents. At the start of 2018, the UAE introduced a 5% Value-Added Tax. That arrived on top of a 3% municipality fee on expat rentals in 2016 and a 10% hotel tax on tourists.
Across the Gulf, some companies have also cut housing allowances and other benefits for their employees. “Expats are … facing increased pressure as employers have begun to scale back their tuition reimbursement packages,” the Boston Consultancy Group said in a May 2018 report. Meanwhile, private school fees have been rising steadily in an education system where the public schools are reserved for Emiratis.
Local newspapers have columns dedicated to advising readers on their debt problems, while in many a café or living room, the whispered talk is often of money troubles – and the question of leaving.
The blockade begun last year against Qatar by the UAE, Saudi Arabia and Bahrain has added to the stress on regional economies.
“There is a lot of tourist traffic between GCC nations,” said Engin, “so Qatar suffered a sharp blow, as the blockade stopped GCC tourists from coming in. In addition, the blockade brought a sense of uncertainty, with people not knowing what might happen next, given how apparently close Qatar and its neighbors had been – yet this still happened.”
The blockade, and this uncertainty has also been stressful for Dubai.
“The reputation of the emirate as a place to do business without political interference took a hit,” said Kristian Coates Ulrichsen, Fellow for the Middle East with Rice University’s Baker Institute in the United States.
“This has clearly irked Dubai’s leadership,” he told Asia Times
Another pressure on the UAE and Saudi Arabia, in particular, has been the war in Yemen, which has seen both nations commit troops and money since they entered the fray in 2015.
“I doubt if the rulers of either country anticipated that after three and a half years, the conflict would still be continuing,” said Ulrichsen. “That must take more out of their budget than they had planned.”
Saving for a rainy day
The governments of the Gulf states are broadly aware of the difficulties, however, with steps being taken recently to try and boost the economy and encourage people to stay.
The UAE and Qatar both announced they were easing work visa regulations earlier this year, while also allowing 100% foreign ownership of companies in certain, targeted sectors outside existing free trade zones.
In early June, the UAE announced a major, 50 billion dirham ($14 billion) stimulus package for the economy. This included a range of measures designed to boost the ease of doing business, while also supporting investment in new technologies and infrastructure.
Many Gulf economies still have major financial reserves to fall back on, even as their public debt levels rise. Kuwait’s sovereign wealth fund, for example, is about four and a half times the size of its GDP, while the UAE’s is around three and a half times.
This year has seen oil and gas prices start to rise again, meaning major windfalls for Gulf economies that have slashed budgets and reorganized their ways of doing business.
“Overall in the Gulf we’ll see a pick up in oil prices and GDP over the next year or so,” said Engin of Capital Economics.
Saudi Arabia, Kuwait and the UAE also announced mid-August that they would support Bahrain’s financing needs, as part of an Arab Monetary Fund program.
The fear for someone like Kasir, however, is that this may all come too late.
“When you travel away from your family and home, you expect to have something to show for it – for it to be worth it,” he said. “You don’t want to come all this way just to end up with empty pockets.”