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Feb 2021

GCC: Gulf financial wealth could run out by 2034 without reforms: IMF

Source: Middle East Insurance Review | Mar 2020

As global oil demand is expected to peak in the next two decades, the associated fiscal imperative could be both larger and more urgent than implied by the GCC countries’ existing plans to reduce their reliance on oil and implement reforms to diversify their economies as well as fiscal and external revenues, said the International Monetary Fund (IMF) in a report.
With the current fiscal stance, the region’s financial wealth could be depleted by 2034 as the region becomes a net borrower, according to the report, ‘The Future of Oil and Fiscal Sustainability in the GCC Region’. 
The GCC countries face a budget reckoning and risk squandering their $2tn in financial wealth within 15 years as oil demand nears peak levels. Furthermore, within another decade, the GCC’s total non-oil wealth will also be exhausted, said the IMF.
With continued improvements in energy-saving technologies, adoption of renewable sources of energy, and a stronger policy response to climate change, the world’s demand for oil is expected to grow more slowly and eventually begin to decline. Hydrocarbon revenue will peak by about 2048.
The six-member GCC accounts for a fifth of the world’s crude production. While GCC producers like Saudi Arabia and the UAE are developing new industries in preparation for a post-oil era, they are not moving quickly enough to avoid running out of cash. 
Development plans need to shift spending and job creation from governments to private businesses and develop more non-oil sources of income more quickly. Regional governments will likely need to cut spending further, save more and introduce broad-based taxation to make ends meet, said the IMF.
Oil price levels
A further decline in oil prices this year, in the face of geopolitical tensions and threats the coronavirus poses to growth, is making the tasks even harder. Should global oil demand trend downward before those plans take root, the countries would have to cope with their longer-term economic problems even sooner, said the IMF.
Alternative price assumptions would not change the general outcome – that financial wealth would be depleted under the current fiscal stance – but would affect its timing. The per-barrel revenue loss from a lower oil price would be limited by the GCC countries’ gain in market share because production by higher-cost producers would be unprofitable.
Similarly, the expected revenue gain from a higher oil price would be reduced by the GCC countries’ market share decline due to improved viability of higher-cost producers and potentially lower oil demand.
These offsetting effects would limit the overall impact of alternative price assumptions. For example, a real oil price of $100 a barrel would delay the time of wealth exhaustion only until 2052, while a real oil price of $20 a barrel would bring it forward to 2027.  M 
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