While the prospect of direct conflict between Iran and the USA has slightly dimmed in the last few weeks, tensions in the Gulf region remain high. The possibility of a miscalculation which could spark a conflict should not be ruled out due mainly to an absence of direct communication channels.
In addition, the ongoing civil wars in Syria, Libya, and Yemen as well as the rising social discontent in Algeria, Iran, Iraq, and Lebanon contribute to a pessimistic glimpse into the future. The spill over effect of these crises – especially the protracted US-Iran conflict – would have unprecedented consequences affecting oil prices, causing a downturn in global investor confidence and a massive new wave of refugees and migrants.
Mohammed Soliman, a scholar with the Middle East Institute, observes that ever since the US withdrawal from the Joint Comprehensive Plan of Action (JCOPA)—or, Iran nuclear deal, there was a level of uncertainty about a possible escalation. In an interview with Inside Arabia, Soliman noted that attacks on Aramco and the assassination of Iranian General Qassem Soleimani, have made investors more uncertain, forcing them to create their own contingency plans.
As crude oil still comprises up to 80 percent of Gulf nations’ national budget, indirect or direct conflict with Iran would increase risks for Gulf oil exports.
As crude oil still comprises up to 80 percent of Gulf nations’ national budget, indirect or direct conflict with Iran would increase risks for Gulf oil exports, disrupting the supply chain including production and distribution to facilities, storage, and transport, and inflicting a severe blow to their economies.
In the short run, though, oil exporters in the region would benefit from higher oil prices, which in the case of the US-Iran conflict could surge well over $100 per barrel. However, many other countries do not have the luxury of maneuvering economic policies, given their high debt levels and low domestic tolerance for austerity.
Moreover, the whole Gulf trade, including oil products—valued at a combined $1.2 trillion, would be at stake, not to mention the potential outflow of foreign investments and pressures on the local financial sector. In the worst-case scenario, banking systems in the UAE, Qatar, and Bahrain would face substantial liquidity risks due to a deposit outflow. It is very likely that the majority of expatriates would return to their home countries taking their deposits from the Gulf’s banks.
According to S&P Global Market Intelligence, retail deposits (from locals and expatriates) in the UAE and Qatar account for around one-quarter of their respective banking systems’ total deposits.
Investors are, of course, wondering how this situation may further develop from a credit perspective and whether credit ratings could be affected.
Soliman thinks that from a global point of view, 2020 looks tough because of a variety of geopolitical risks in many regions simultaneously. But the Gulf countries have a strong capital position and have shown resilience following the Aramco attack.
The main concern for the Gulf is the coronavirus and its impact on Chinese tourism to the Gulf, in addition to the oil exports to China.
At this point, Soliman thinks “the main concern for the Gulf is the coronavirus and its impact on Chinese tourism to the Gulf, in addition to the oil exports to China—a top buyer of crude from Gulf states.”
Maya Senussi, Senior Economist at Oxford Economics, thinks there is a reasonably positive read on recent developments and she continues to believe the countries involved in the regional feud are working to get it resolved. “Even prior to General Soleimani’s assassination, there were signs the crisis was thawing and that’s a positive from a credit perspective,” she told Inside Arabia.
In similar fashion, Reuters poll of economists suggests that economic growth in the Gulf should pick up this year and next, with Saudi Arabia’s investment program and Expo 2020 in the UAE greatly contributing to more positive business, although the region will continue to feel the impact of oil output cuts.
However, despite this cautious optimism, states in the Gulf Cooperation Council (GCC) are “exposed to the slowdown in global growth – and China’s growth in particular – via two main channels: softer oil demand (with lower prices underpinning the need for ongoing production cuts by OPEC producers) and weaker trade and tourism,” according to Bilal Khan, Senior Economist at Standard Chartered.
The epidemy of the coronavirus (COVID-19), according to many, will have serious consequences for the world and regional economies, particularly the oil-exporting GCC states resulting in downward revisions of economic growth. Analysts have said the main feed-through of the coronavirus outbreak into the GCC is from the hydrocarbon sector. The newest econometric models presented by the MUFG Bank’s research department, signal real GDP to register 1.7 percent this year from 2.5 percent previously.
On the other hand, warmer diplomatic tones between Gulf monarchies, that could be heard in the last few months, may contribute to the improvement of the business climate once the virus crisis is over. While the decline in political trust has undermined the ability of the region to work toward common goals, individual objectives, according to Senussi, might not be as far apart as in the past. For instance, Saudi Arabia, took steps to de-escalate the conflict involving Iran at the start of January.
The US limited response to the Aramco attack made the Gulf countries skeptical of its role as a security guarantor.
Nevertheless, Soliman observes that while Iran’s attack on Aramco was alarming on all levels, the US limited response to the Aramco attack made the Gulf countries skeptical of its role as a security guarantor. Despite the fact that the USA increased its military presence in the Gulf, moving some 3,000 troops there, Washington’s policy of disengagement from the region, has amplified the sense of insecurity among the majority of Gulf leaders.
The increased skepticism towards the USA created some sort of understanding among Gulf officials on the necessity to move beyond mutual grievances from 2017. “We heard about talks between Riyadh and Doha, and the resumption of UAE-Qatar postal services—these indications are positive and move the Gulf capitals closer than before,” according to Soliman.
But in Senussi’s view, resolving regional disputes, when it finally happens, will not restore the economic status quo, as it is difficult to imagine things going back to what they used to be.
Despite less hostile rhetoric, Gulf states still remain divided, and it remains to be seen whether they can implement a deterrence policy without antagonizing Iran.
Finally, while the instability in the region does not seem to be growing to levels that would become unsupportive for investment sentiment, according to Senussi, the unexpected outbreak and spread of the coronavirus may also scale down the animosities in the Gulf at least in the near-term.
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