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Gulf economy planners face 2019 challenges

Uncertainty over oil prices is creating problems for GCC states as they prepare budgets for the year ahead

Not so long ago, Gulf state economists were making projections for 2019 on the basis of oil remaining in the region of $80-90 a barrel. But developments over the past weeks have forced them to get their calculators out again, as prices slipped to less than $70 a barrel. Fears about global oil shortages eased, as the US granted waivers to eight states to allow them to continue buying oil from sanctioned Iran, and President Trump urged Opec states to produce more. Another factor is the rise of US oil production to 11.6m barrels a day. The expected global tight supply has not materialised.

The dilemma that economic planners in the Gulf states face is that the market looks like remaining uncertain in the months ahead. At least that is what many commentators are saying, but not all. Analyst Capital Economics, for one, is providing an assessment that will be anything but music to the ears of the GCC governments. It believes that the recent fall in oil prices "probably has further to run", even suggesting that Brent will drop to $60/b in 2019 and $55/b by end-2020.

This downward trend, in the view of Capital Economics, will mean that "economic recovery in the Gulf will peak in the middle of 2019 and perhaps even sooner". In the longer term, "budget and current account positions in the Gulf will deteriorate".

If this forecast is accurate, then all the GCC states will face challenges. Those with less robust economies, like Bahrain and Oman, will need to seek further financial support from their neighbours. But even Saudi Arabia, with its huge volume of exports, will have some difficult choices to make. The kingdom's attempt to wean itself off oil dependence—the bedrock on which the Vision 2030 reform package is built—envisages greater investment in the private sector and in non-oil ventures. In the short term, the only revenue available for that envisaged investment comes from oil exports.

Saudi Arabia has also seen an acceleration of capital flight over the past year, and the recent controversy over the killing of Jemal Khashoggi has damaged the kingdom's image and will have done nothing to encourage new investment from abroad. With some of the key Vision 2030 goals already looking beyond reach, a lot of revisions to financial calculations will be needed in the months ahead.

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