Key takeaways

• The coronavirus-related collapse in global oil prices threatens the economic and fiscal stability of all six Gulf Cooperation Council (GCC) countries. While some have the financial reserves to better manage a prolonged period of low oil prices, others will need to make deep cuts to government spending and find new ways to raise revenue to avoid ballooning deficits. These differing levels of financial resiliency will affect the urgency with which Gulf governments approach austerity and the kinds of measures they will consider.
• Qatar, Kuwait, and the UAE have the least need to impose immediate cuts. Qatar is in the strongest position with the lowest breakeven oil price and large financial reserves. Though highly oil-dependent, Kuwait has the deepest foreign reserves. The UAE is the most diversified economy in the region and might ordinarily be better placed than Kuwait to withstand low oil prices, but its large tourism, hospitality, and logistics sectors have been hit hard by the pandemic. In the near term, all three countries will likely make some cuts to government spending while seeking to shield their citizens from the effects of austerity.
• Saudi Arabia, Oman, and Bahrain have already unveiled sweeping austerity measures and will likely impose more. Saudi Arabia is certainly in a better position than Oman or Bahrain, where oil revenues and financial reserves are much lower and pre-existing debt levels much higher. In Saudi Arabia, the most significant cuts are likely to fall on some of the Kingdom’s ambitious Vision 2030 programs and other major development projects. Oman and Bahrain have made drastic cuts to state spending that will be felt by their populations, raising the risk of civil unrest.
• The fiscal responses of GCC countries to low oil prices present a variety of risks for foreign companies doing business in the region. Gulf countries will likely raise existing taxes or impose new ones to diversify their revenues. Revenue shortfalls could also increase the risk of payment delays, a perennial problem in many Gulf countries, and lead to more cost-conscious government procurement. Finally, as unemployment grows across the region, governments may face growing pressure to impose more far-reaching localization policies. To mitigate these risks, companies will have to maintain strong relationships with government stakeholders and carefully craft their value propositions to resonate in this new environment.

Low oil prices threaten Gulf economies

As Gulf economies face the related crises of the COVID-19 outbreak, the sharp drop in oil prices, and the global recession, they must make difficult decisions about how to respond and potentially restructure their economies. History provides some guide, but the threat of persistently low oil prices and a long-term shift away from hydrocarbons and toward renewables will likely encourage governments to make deeper cuts and more serious reforms than they had in the past.

But even after a series of reforms aimed at boosting the private sector and attracting foreign investment, GCC economies remain highly dependent on oil and gas as a driver of government revenue and growth and therefore vulnerable to oil price shocks.

The prolonged decline of oil prices in the 1980s and 1990s resulted in retrenchment throughout the Gulf but few long-lasting reforms, notwithstanding some notable exceptions like Dubai’s wholesale transformation into a globally competitive trading and tourism center. During the boom of 2002-14, governments’ fiscal breakeven price of oil rose rapidly as spending ballooned. In Saudi Arabia, for example, the welfare and benefits packages announced in 2011 following the Arab Spring added an estimated $16 per barrel to the Kingdom’s breakeven oil price. While many countries made some attempts to diversify their economies and took limited steps towards reform, it was not until the collapse of oil prices in 2014-15 that GCC governments began to introduce serious austerity measures. These efforts have primarily centered on cutting subsidies and introducing new taxes and fees, while finding ways to reduce the burden on (especially low-income) citizens. Governments instituted workforce nationalization initiatives aimed at boosting citizen employment in the private sector and reducing reliance on foreign workers. They have also actively promoted public-private partnerships (PPPs) and privatization. But even after a series of reforms aimed at boosting the private sector and attracting foreign investment, GCC economies remain highly dependent on oil and gas as a driver of government revenue and growth and therefore vulnerable to oil price shocks.

Not all Gulf countries are in the same boat

Although the Gulf economies are broadly dependent on hydrocarbons and will all suffer from the decline in oil prices, they will not all suffer equally. We divide the Gulf countries into three categories according to relative severity of the economic and fiscal crises they will face due to low oil prices:

• With small populations, high per capita income, and large financial buffers, Qatar, Kuwait, and the UAE—in roughly that order—are the best-positioned to weather a prolonged period of low oil prices. Their governments have more policy flexibility, which reduces the likelihood that they will impose sweeping austerity measures.
• Saudi Arabia is in a category of its own. The largest economy in the region, it has sizeable reserves but is heavily oil-dependent and has poured resources into its ambitious Vision 2030 reform program. The Kingdom has already announced sweeping austerity measures to secure its longer-term financial position.
• Bahrain and Oman are in the most precarious fiscal position. With the highest breakeven oil prices in the region and depleted reserves, they face a daunting choice: either impose drastic austerity measures and risk social unrest or fail to do so and risk economic instability.

Qatar, Kuwait, and the UAE start from a position of relative strength

The countries in the strongest position—Qatar, Kuwait, and the UAE—share three key features: they have small citizen populations, high per capita incomes, and large sovereign reserves. They also have lower breakeven oil prices than the other Gulf countries, though with the exception of Dubai in the UAE, their economies remain highly dependent on hydrocarbons. All three could hypothetically maintain current spending levels at current oil prices for several years without running out of cash, but they have historically been reluctant to draw down their reserves. Instead, they will likely increase borrowing and impose modest austerity measures, while avoiding actions that could significantly undermine the standard of living for their citizens or deter foreign investors.

Qatar

Qatar is in the strongest fiscal position of the three countries, with the smallest citizen population, highest per capita GDP, and lowest breakeven oil price (less than $40 per barrel) of any country in the region. Though it remains highly dependent on hydrocarbons, Qatar has successfully pivoted away from crude oil toward natural gas production in recent years and is now the largest exporter of liquified natural gas (LNG) in the world. While natural gas prices have also been hit hard by the pandemic, they appear to be poised for a more sustained recovery as drilling activity declines and will be less affected over the longer-term by climate change policies. Qatar also brings in substantial investment income through its sovereign wealth fund, the Qatar Investment Authority (QIA), with its vast portfolio of overseas strategic investments. Moreover, despite the ongoing diplomatic crisis with several of the more powerful GCC countries and massive spending increases in preparation for the 2022 World Cup, Qatar has managed to maintain relatively strong fiscal discipline. While its Gulf neighbors have all run large deficits since 2015, Qatar recorded surpluses of 4.4% and 3.7% in 2018 and 2019, respectively.

Although these factors could allow Qatar to survive a prolonged period of low oil prices without imposing drastic spending cuts, the country will likely impose some austerity measures anyway in the name of fiscal discipline. After the 2014-15 oil market crash, Qatar hiked utility rates, doubled fines for wasting water, and raised the cost of the postal services for the first time in eight years. The government also cut funding for the Qatar Foundation, its internationally-focused philanthropic arm, by nearly half and suspended plans to roll out a national healthcare scheme. However, the country tried to shield its citizens from the effects of austerity. It largely limited public sector layoffs to expatriates and raised salaries for Qataris employed in the public sector to compensate for cuts to utility subsidies.  

Qatar will likely pursue a similar strategy this time around, imposing modest austerity measures such as further subsidy cuts, while restricting more painful measures like government layoffs to expats. One area where Qatar could achieve significant savings is its preparations for the World Cup. While the country seems to be pressing ahead with construction projects for the event, despite budget constraints and criticism that construction work could facilitate the spread of COVID-19, it could scale back or delay some projects if low oil prices persist. Over the longer-term, low oil prices may underscore the need for further economic diversification—in line with proposals in Qatar National Vision 2030—and spur further investments by the government in priority sectors like tourism and logistics.

Kuwait

Like Qatar, Kuwait benefits from a small population, high per capita GDP, and massive financial reserves. By far its biggest strength is its balance sheet. Thanks to a longstanding policy requiring that 10% of annual revenues be transferred to the sovereign wealth fund, Kuwaiti reserves total an estimated $527 billion, or 380% of GDP, compared to 138% for Qatar and 185% for Abu Dhabi. However, Kuwait is highly dependent on oil and gas, which account for roughly 60% of GDP and 90% of export earnings, and it has a high breakeven oil price of roughly $60 per barrel (though not as high as Saudi Arabia or the UAE). The country has spent half a decade in the red since the 2014-15 oil crash. In January, the Ministry of Finance projected a record deficit of $30.33 billion, or 25% of GDP, for the fiscal year beginning April 1, but this assumed a crude price of $55 per barrel. With oil expected to trade at around $32 per barrel for the year, the country’s deficit could reach 40% of GDP.

Despite its large financial buffers, Kuwait has more limited readily available assets. Its General Reserve Fund (GRF), the portion of its reserves used to cover deficits, could be depleted in just two years if current oil prices and spending levels persist. To avoid depleting the GRF, the Kuwaiti government would have to dip into its larger Future Generations Fund (FGF) or tap international bond markets, either of which would require the approval of parliament, never an easy task in Kuwait’s contentious parliamentary system. Parliament has also discussed suspending its mandatory annual transfer of 10% of revenues to the FGF. Following the 2014-15 oil crash, Kuwait approved several bond issues and imposed some austerity measures, including cuts to fuel, water, and electricity subsidies and travel allowances. As in Qatar, the burden of subsidy cuts in Kuwait fell primarily on expatriates, not Kuwaiti citizens. However, government efforts to impose stricter austerity measures floundered amid stiff resistance from the opposition in parliament, which rode anti-austerity sentiment to a near-majority in the 2016 elections. Parliament has also resisted passing a proposed debt law that the government would need to be able to borrow more. Earlier this year, the government introduced a new version of the law that would roughly double the debt ceiling, which parliament again shot down.   

The Kuwaiti government is unlikely to mount any kind of significant fiscal response to low oil prices before the parliamentary elections in October. To manage its revenue shortfall in the meantime, the government will likely have to impose preemptive cuts to operational and capital expenditures. Ministries have reportedly been told to expect drastic cuts in budgets and that they will not receive any additional funding. The government could also drag out payment on various debts that it perceives it can delay with few obvious consequences.

If the government succeeds in reversing electoral gains by the opposition in the upcoming elections, it will likely resurrect austerity measures that it was unable to pass following the 2014-15 oil crash, including additional subsidy cuts and caps on government salaries, and seek to push through the long-delayed debt law so that it can borrow again and avoid drawing down its reserves. As in the past, the government may face pressure to push the burden of austerity onto expatriate workers. In 2019, a senior MP introduced legislation to impose taxes on expat remittances, which the government ultimately rejected on the grounds that it could harm the economy and create a black market for remittances. Although Kuwait has said that it plans to implement the GCC-wide VAT by 2021, few expect the country to follow through.  

UAE

The UAE, with a high per capita income and a relatively small citizen population, more closely resembles Qatar and Kuwait than it does Saudi Arabia. Years of proactive diversification efforts have made the Emirati economy the least oil-reliant in the region. However, oil-rich Abu Dhabi still relies on oil sales and related tax revenue for nearly 80% of its total revenues. Dubai relies on oil for less than 1% of GDP, but its particular brand of diversification—with its heavy focus on tourism, trade, and logistics—has been especially hard-hit by the COVID-19 pandemic. Abu Dhabi may have to step in at some point to rescue Dubai as it did during the 2008 financial crisis. The two emirates are reportedly in talks about a support package that could include mergers of Abu Dhabi and Dubai entities that compete directly, such as Abu Dhabi-based Etihad Airways and Dubai-based Emirates. This would further concentrate political power in Abu Dhabi and accelerate the trend of growing federalization we have seen in recent years.

In the near-term, the federal and Abu Dhabi governments will likely continue to respond to the COVID-19 pandemic with stimulus measures, especially for SMEs, delaying austerity until the worst of the pandemic has passed. In contrast, Dubai has already begun to impose drastic austerity measures. The Dubai Department of Finance has directed government agencies to slash capital spending by at least half, halt new hiring indefinitely, and postpone all new construction projects. Over the medium- and long-term, we expect low oil prices to spur some degree of structural reform and fiscal consolidation within the federal and Abu Dhabi governments as well. Last week, Sheikh Mohammed bin Rashid Al-Maktoum (MBR), the Vice President of the UAE and Ruler of Dubai, announced via Twitter that the UAE is reassessing the role and size of the federal government and may restructure or merge some ministries to make it more flexible and cost-effective.

One potential next step for the UAE may be to impose a corporate income tax, which has been repeatedly floated and recommended by the IMF. The country could also impose additional excise taxes, or “sin taxes,” on products such as cigarettes and sugary drinks, as it most recently did in August. However, the UAE Minister of Finance has said that the country does not plan to increase the VAT as Saudi Arabia has done, a signal that the UAE will avoid taking measures that could seriously jeopardize its reputation as a friendly destination for foreign investors. 

Saudi Arabia is already tightening its belt

Historic responses to oil price collapses

In response to previous oil price collapses, Saudi Arabia has typically preferred to cut spending on major projects and has found it difficult to institute broad reforms or significant austerity measures. The government cut spending by more than half between 1981 and 1986 but continued to run deficits every year from 1983 until 1999. Since the government was wary of reducing distributional programs or government employment, spending on major projects came to a standstill, which weakened the infrastructure base from which to attract foreign capital and develop the private sector. The few austerity measures that the government did introduce were in some cases reversed, as happened with electricity and water prices in 1985 and 1986 respectively.

Following the rise of Crown Prince Mohammed bin Salman and the consolidation of decision-making authority within the royal family, the Kingdom is now more able than ever to implement politically difficult austerity measures and reforms. After the 2014-15 oil price collapse, which saw government revenues fall 50% by 2016, the Crown Prince launched Vision 2030, the Kingdom’s flagship social and economic reform program to diversify sources of revenue and develop the non-oil private sector. Reforms included: new labor regulations to restrict certain jobs to citizens; higher Saudization quotas; cuts to electricity, fuel and water subsidies; an anti-corruption crackdown that seized more than $100 billion through financial settlements; the imposition of a 5% VAT; and a new bankruptcy law. However, the government also reversed some reform measures that proved particularly unpopular and had a negative impact on the middle class. In April 2017, the government reinstated public sector salaries and benefits that had been cut six months before. In January 2018, the government then granted an additional monthly allowance to the same employees to compensate for the rising cost of living resulting from other austerity measures.

Regardless of the government’s reform efforts, the crash took a large toll on the Kingdom’s overall fiscal position. From 2014 to 2018, the debt-to-GDP ratio rose from 2 percent to 19.1 percent and the central government net financial asset position (defined as government deposits at the central bank less gross debt) fell from 50 percent to 0.1 percent of GDP. While these figures are still strong from a global perspective, the Kingdom will need to be wary of raising its borrowing levels too quickly.

Measures taken to respond to the current crisis

In response to the current crisis, the government has signaled that it will again make significant spending cuts to capital projects but has also announced other serious austerity measures. Minister of Finance Mohammed Al-Jadaan unveiled a 5% budget cut in mid-March, and ministries have reportedly been asked to submit proposals for further reductions up to 20%. On May 10, the government announced a raft of new austerity measures totaling $26.6 billion, or roughly 10% of the original FY2020 budget. The measures include a tripling of the VAT to 15%, the suspension of cost-of-living allowances for government employees, and cuts to capital expenditures rumored to total about $8 billion. Minister Al-Jadaan has also announced plans to raise an additional $27 billion in debt on top of the $31 billion already planned for 2020. The decision to triple VAT, in particular, may have been motivated in part by a desire to reassure ratings agencies and international financial markets and thereby lower the cost of borrowing. Today (May 29), the Kingdom announced increases in customs tariffs beginning June 10.  

The Kingdom does not plan to increase its drawdown of reserves from the $31 billion initially planned for this year. Nonetheless, foreign reserves have reportedly fallen to around $464 billion during the current crisis, the lowest level since 2011 and significantly lower than their peak above $735 billion before the 2014 oil price crash. The Public Investment Fund, the Kingdom’s sovereign wealth fund, has meanwhile sought to increase its foreign asset ownership while prices are depressed by reportedly buying stakes totaling more than $7.5 billion in several energy, travel, tourism, technology, and entertainment companies.   

Protecting households, SMEs, and lower-income citizens from economic fallout is a top priority for the Kingdom. Despite the reduction in allowances for public-sector employees, the government proceeded with the disbursement of $493 million in “Ramadan aid” to beneficiaries of social security on May 11, the day after the announcement of the austerity measures. The government has also sought to protect the jobs of Saudi citizens impacted by the pandemic by pledging to pay up to 60% of the salaries of Saudi employees in the private sector and by announcing that private-sector employers may only terminate employees after those employees have undergone a six-month period of reduced salaries.

Likely areas for spending cuts

With regard to major government projects, the most significant cuts are likely to fall on the Kingdom’s Vision 2030 Realization Programs (VRPs), gigaprojects, and other major construction projects. The VRPs have been under review since December 2019 to evaluate whether their progress justified their large budgets. Some of these programs were likely to be downsized or scrapped even before the pandemic, and the current context means that budget cuts could be deeper than expected for many of them, especially those related to tourism and entertainment, which Minister Al-Jadaan singled out as areas where the Kingdom is currently saving money during a recent interview. Housing and healthcare initiatives, meanwhile, will likely be areas for continued spending.

The Kingdom’s high-profile gigaprojects, which have massive budgets and ambitious timelines, are also likely to be delayed. Projects like Neom, a $500-billion initiative to build a technology city from scratch near the Red Sea coast, have always had a distant and unclear return on investment and are top candidates for short-term budget cuts and extended timelines. Several of the gigaprojects are also tourism- and entertainment-related, adding to the likelihood that they face delays and reduced budgets. Many of these projects will continue, but they are likely to slow down—possibly significantly—as the Kingdom channels its reduced spending elsewhere.

Other major construction projects across the Kingdom are also likely to face delays. The construction sector was particularly affected by reduced government spending following the 2014-15 oil price collapse, with contractors reporting severe payment delays as late as the end of 2016. Beyond the gigaprojects, some of the major construction projects in the Kingdom include the Jabal Omar residential and hotel complex in Mecca, the $60-billion Jeddah Metro project, and a $23-billion plan to build green areas in Riyadh, including a park four times the size of New York’s Central Park.

Oman and Bahrain face fiscal emergencies

Oman and Bahrain are the most vulnerable Gulf economies, with outsized spending on public wages and subsidies, depleted reserves, and the highest breakeven oil prices in the GCC (at $87 and $96 per barrel, respectively). During previous oil price crashes, Oman and Bahrain maintained or only temporarily reduced spending, in part out of concern that austerity could spark social unrest. Both countries witnessed major popular uprisings during the 2011 Arab Spring and responded by significantly increasing spending to appease their populations. After the 2014-15 oil crash, Oman and Bahrain set ambitious fiscal adjustment goals and implemented some reforms but did not reduce spending to pre-2011 levels. Instead, they borrowed heavily and drew down their reserves, which resulted in Bahrain and Oman being downgraded to junk status in 2016 and 2018 respectively. Neither country will likely be able to borrow its way out of the current crisis. To avoid default, they will have to institute drastic spending reductions, even at the potential risk of social unrest.

Oman

Declining reserves have left Oman with few options other than to substantially reduce spending and raise new revenue. Oman’s State General Reserve Fund (SGRF) has reportedly fallen by a third to $14.3 billion since the onset of the crisis. The Omani government has announced that it will cut 15% of total spending and reduce wages for new public employees. It has also instructed state-owned enterprises (SOEs) to cut 10% of nonessential spending and suspend new projects. Having already made deep cuts to government spending, Oman may now be forced to implement austerity measures it has previously avoided, such as broad public sector wage reforms or adoption of the GCC-wide VAT, which it delayed last year, likely to avoid social unrest. Oman reduced some subsidies and increased corporate income tax rates in 2017 but backtracked on additional measures after protests broke out over the country’s high unemployment rate.

Without money to invest directly, the Omani government may implement business environment reforms in hopes of spurring private-sector growth and investment and creating jobs for young Omani nationals, who face high unemployment. Since 2015, Oman has introduced several important regulatory reforms in line with its Vision 2040 reform agenda and its National Program for Enhancing Economic Diversification (Tanfeedh), which aims to facilitate growth and investment in the promising fisheries, manufacturing, and tourism industries. In 2019, Oman issued new foreign investment and companies laws, which opened up additional sectors to foreign investment and removed local shareholder requirements, and strengthened its public-private partnership (PPP) framework. To mitigate the risk of youth-driven social unrest, the government will likely combine future privatization efforts with more aggressive Omanization policies, such as stricter national hiring quotas and expatriate visa bans.

Bahrain

The Bahraini government has announced that it will reduce nonessential spending by 30% and delay many construction projects. In 2018, Bahrain received a $10-billion bailout from Saudi Arabia, Kuwait, and the UAE. In exchange, Bahrain promised to impose austerity measures with the goal of eliminating its deficit by 2022, but it has repeatedly missed fiscal adjustment targets. During previous periods of low oil prices, Bahrain has cut capital spending before handouts and subsidies. It will likely do the same this time around, delaying major transportation, manufacturing, and real estate projects that are currently underway. The most important of these projects include the high-profile Bahraini International Airport expansion and the Bahrain Petroleum Company (Bapco) refinery modernization program.

Government spending reductions pose a strong risk of reigniting social unrest and bringing long-standing divisions between the Bahraini Sunni-led monarchy and the majority Shiite population back to the fore. In 2011, Shiite citizens demanded major political reform that challenged the position of the ruling Al Khalifa royal family. The government ultimately responded with a military crackdown, supported by Saudi Arabia and the UAE, and a sharp increase in social spending and public-sector wages to placate protestors. The looming economic crisis and its significant effects on Bahraini citizens could lead to the resumption of civil unrest, though unrest approaching the levels seen during the Arab Spring remains unlikely.

Ability to maintain currency pegs in question

As their fiscal outlooks worsen, Oman and Bahrain face mounting speculation over their ability to maintain their longstanding currency pegs to the U.S. dollar. By the standard metrics of import cover (e.g., how long they could cover imports using foreign reserves) and debt-to-foreign reserves ratio, Oman and Bahrain are the GCC countries least able to withstand prolonged pressure on their currency pegs. Both countries have withstood past pressure to revalue their pegs during periods of high oil prices and devalue them during periods of low prices, recognizing that the pegs are an essential underpinning of their currency credibility. Larger GCC states such as Saudi Arabia and the UAE arguably have a strong interest in ensuring that Oman and Bahrain maintain their pegs for fear of a domino effect and higher import prices. This could prompt them to step in to support Oman and Bahrain, as they have done in the past. However, the other GCC countries are also managing the impact of the oil crash on their own economies and may be more cautious in their support this time around.

Implications for business

The responses of the GCC countries to low oil prices present a variety of potential challenges for foreign companies operating in the region.

The responses of the GCC countries to low oil prices present a variety of potential challenges for foreign companies operating in the region. These include purely financial challenges such as the potential for higher tax burdens as governments look to raise new revenues and heightened risk of non-payment or delayed payment on government contracts as countries slash spending. Low oil prices also raise the risk of longer-term policy-related shifts such as greater pressure to localize employment and content and more cost-conscious government procurement. Finally, the combined impact of the COVID-19 pandemic and low oil prices could pose security risks for foreign companies across the broader MENA region, with several countries outside of the GCC already experiencing an increase in social unrest as the deteriorating economic situation spurs dissatisfaction with ruling elites and calls for political change. Below we compare the relative risk of these challenges in each of the GCC countries and explore the potential impact on foreign companies in greater detail.

Tax havens no more

Countries across the Gulf will likely raise existing taxes or impose new ones in an effort to diversify their revenues. Saudi Arabia moved first with its tripling of VAT, but other Gulf countries could follow suit. The UAE and Bahrain have both explicitly ruled out increasing VAT, and Qatar is unlikely to do so, having just imposed VAT for the first time in January. However, these countries have other options if they wish to raise new revenues. The UAE is the only remaining country in the region with no national corporate income tax, though individual emirates have in some cases imposed their own taxes. Imposing a modest corporate tax at the federal level would be a logical step. Qatar, Bahrain, and other countries have turned to so-called “sin taxes” since 2015. Although Bahrain may have already exhausted its options in this regard with more than 200% taxes on alcohol and cigarettes, Qatar could still increase its rates. As was the case after 2015, policymakers across the region will likely try to shield their citizens from the impact of austerity by concentrating tax and fee increases on foreign workers and companies. This could translate into higher expat fees and commercial registration fees, among other measures, though the desire of Gulf countries to increase foreign investment will moderate how far they are willing to go. 

Heightened risk of payment issues

Non-payment or delayed payment on major government contracts has been a perennial problem in Saudi Arabia, the UAE, Kuwait, and other Gulf countries, especially during periods of low oil prices. Following the last oil price crash, a survey by law firm Pinsent Masons indicated that 95% of firms working on major GCC construction and infrastructure projects experienced longer payment periods in 2015 than 2014. In many cases these payment delays persisted for several months or even years. Saudi Arabia and the UAE have resolved most outstanding debts, reformed their procurement and payment systems, and vowed to put payment delays behind them. For this reason, payment delays are less likely now than they were a few years ago, even as Saudi Arabia and the UAE face unprecedented budgetary shortfalls. In Kuwait, however, parliamentary gridlock has prevented similar reforms. The country still owes substantial debts to foreign companies, including billions to foreign healthcare establishments where its citizens have received care, raising the risk of further payment delays. In all three countries, foreign firms should take proactive steps to mitigate the risk of payment issues by building strong relationships across relevant government entities and including clear and enforceable terms in future contracts ensure fair and timely payment.

Greater pressure to localize

The collapse of oil prices … could contribute to a substantial increase in unemployment across the Gulf. This will increase pressure on governments to create jobs for their nationals and may cause them to take a harder line on localization.

The collapse of oil prices, near-shutdown of the non-oil economy, and probable trimming of government payrolls due to austerity measures could contribute to a substantial increase in unemployment across the Gulf. This will increase pressure on governments to create jobs for their nationals and may cause them to take a harder line on localization. Saudi Arabia has struggled with chronic under-employment among Saudi nationals for years, with an official unemployment rate of roughly 12% at the end of 2019. While the other Gulf countries have generally relied on incentives to encourage foreign firms to hire locally, Saudi Arabia has imposed a quota-based system mandating a certain ratio of local employment across a growing list of sectors. Oman has also imposed quotas in certain sectors, though not to the same extent as Saudi Arabia. Already during the current crisis, Saudi Arabia’s move to pay a proportion of the salaries of Saudi citizens working in the private sector served partly as a reward for heavily Saudized companies. Further favorable treatment for hiring locals or the introduction of stricter quotas could be future steps. The UAE and Bahrain are unlikely to go so far as imposing strict localization quotas but could ratchet up pressure on foreign firms to create jobs for nationals. With small citizen populations and very low unemployment, Qatar and Kuwait are unlikely to impose stricter localization requirements, except perhaps with regard to public sector employment. 

Shifting procurement priorities

Across the Gulf, there is likely to be heightened focus on cost-efficiency in procurement decisions. The days when procurement decisions in Gulf countries largely depended on strong relationships with the contracting entities, and less so on the technical merits and price, are probably over. The UAE and Saudi Arabia have taken significant steps in recent years to improve efficiency and transparency in procurement decisions as part of their broader push to improve fiscal discipline. In Saudi Arabia in particular, foreign companies should anticipate heightened focus on cost-effectiveness and may find that the prestige long associated with American companies is less important than cost considerations. The use of local content will also be a factor in contracting, but is likely to be outweighed by price in most cases over the short-term. Greater concern with cost may further entrench the growing competitive advantage of Chinese firms, especially in sectors such as technology and construction, though American and other multinationals that can point to quality advantages in their work may still succeed. In countries like Kuwait where procurement decisions remain somewhat ad hoc and lack centralized oversight, there is still likely to be greater focus on cost even if procurement outcomes are not always as predictable.

Heightened security risks

On the one hand, we could see a reduction in regional tensions with Iran as governments turn inward … On the other hand, the impact of the pandemic and low oil prices could undermine political stability in several countries across the region.

The collapse in global oil prices also has geopolitical implications that could affect business in the region. On the one hand, we could see a reduction in regional tensions with Iran as governments turn inward to confront the dual challenge of the COVID-19 pandemic, which has hit Iran especially hard, and low oil prices. After rising tensions with Iran last year, with tanker attacks over the spring and summer and the attacks on Saudi oil production facilities in September, the UAE and even Saudi Arabia signaled their desire for de-escalation in the region, recognizing how much they stood to lose if the crisis continued. Increased strain on state finances could also decrease funding for various armed proxy groups across the region. On the other hand, the impact of the pandemic and low oil prices could undermine political stability in several countries across the region. As discussed above, austerity measures could spur civil unrest in Oman and Bahrain, though likely not to the levels seen during the Arab Spring. Even if Oman or Bahrain experience significant unrest, the other GCC countries (particularly Saudi Arabia and the UAE) would almost certainly intervene to prevent them from descending into political chaos. 

Countries that had preexisting economic and political crises are in an even more precarious position. Iraq and Lebanon saw the eruption of mass anti-government protests last fall that forced the resignation of their respective prime ministers and the formation of new governments. Now, the deteriorating economic situation appears to be driving a resurgence in unrest, after COVID-19 concerns temporarily took the wind out of the sails of protests, especially in Iraq. Iraq is highly oil-dependent and sells its oil at a discount relative to global averages. In April, its oil revenues plummeted by half, raising fears of economic collapse and forcing the government to contemplate highly unpopular austerity measures. Protestors returned to the streets in Baghdad, Basra, and other cities in recent weeks, ending two months of relative quiet. Although Lebanon derives almost none of its revenue from oil, it is highly dependent on aid from Gulf governments and remittances from Lebanese working in the Gulf, both of which have been affected by the collapse in oil prices. Acute food shortages have pushed protestors to defy curfew orders and sparked violent clashes with police in Beirut and the northern city of Tripoli. If unrest spirals out of control in either country, it could pose spillover risks for the Gulf countries and undermine the security and stability of the region as a whole.

Planning for a new environment

Coming at a time of unprecedented disruption to global business continuity, the collapse in oil prices will substantially alter the business environment in the Gulf countries. Foreign companies operating in the region will need to adjust course accordingly.

Building strong relationships

As regional governments grapple with fewer resources and greater needs, it will be more important than ever for companies to proactively build strong relationships across government …

As regional governments grapple with fewer resources and greater needs, it will be more important than ever for companies to proactively build strong relationships across government, both with stakeholders that are directly relevant to their business and those that have broader influence over spending decisions and priorities. As a precaution against changes in leadership, companies should seek to build relationships at both the senior and working levels within especially important government entities and ministries. Reshuffling of senior leadership positions is quite common in Gulf countries and may become more so governments reassess their priorities and work to improve efficiency and organization. By building strong relationships with a wide range of relevant stakeholders, companies can mitigate the risk of non-payment issues, harmful localization decisions, and other challenges and position themselves well to respond to such challenges if they arise.

Demonstrating value

In anticipation of more cost-conscious procurement across the Gulf, companies should carefully craft their value propositions to stress cost-competitiveness and quality over prestige and brand recognition. Price may be the overriding factor in procurement decisions over the short-term, but government stakeholders may still be receptive to companies that demonstrate a clear quality advantage. Companies should also stress their commitment to being good corporate citizens and their desire to be helpful to governments as they navigate the current crisis. Proactive commitments on localization, knowledge transfer, and other priorities of Gulf governments could help to garner goodwill and strengthen companies’ arguments about the superior overall value they bring relative to cheaper competitors.

Mitigating risks

The COVID-19 pandemic and oil price crash have raised the overall risk profile for companies operating in the Gulf. In this context, companies with significant exposure to the risks identified above should consider stepping up their risk monitoring and contingency planning efforts to stay ahead of adverse developments and respond to them if they arise. In the case of payment-related risks, for example, this could include building additional flexibility into project timelines and budgets and establishing tripwires for escalating engagement with relevant government stakeholders if payment issues arise. 

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About ASG

Albright Stonebridge Group (ASG) is the premier global strategy and commercial diplomacy firm. We help clients understand and successfully navigate the intersection of public, private, and social sectors in international markets. ASG’s worldwide team has served clients in more than 120 countries.

ASG's MENA Practice has extensive experience helping clients navigate markets across the Middle East and North Africa. For questions or to arrange a follow-up conversation please contact Nate Hodson.