GCC economies could lose $2 trillion of wealth by 2034, says IMF
10 February 2020
The Arab economies in the Gulf region that currently supplies a fifth of global oil and are enjoying the benefits of high oil prices risk losing $2 trillion of their financial wealth within the next 15 years in the face of budget constraints, according to the International Monetary Fund (IMF).
According to an IMF report, oil demand will near peak levels in another 15 years and may start falling sooner than expected, putting a strain on the finances of the six-member Gulf Cooperation Council, says the IMF report.
IMF projects that some of the richest Gulf Arab states could exhaust their net financial wealth by 2034 as the region becomes a net debtor, and within another decade, their total non-oil wealth would also be exhausted, says the report prepared by a team of Middle East and Central Asia specialists at the Fund.
The report suggests decisive economic reforms, especially by the richest of the oil-producing GCC states in order to arrest a sudden depletion of both oil and non-oil wealth within another decade. Middle Eastern states could exhaust their net financial wealth by 2034 as the region becomes a net debtor, the fund projects.
Within another decade, their total non-oil wealth would also be exhausted, the IMF said in the report prepared by a team of its Middle East and Central Asia specialists as well as the research department.
“Countries in the region need to think long-term and strategically because the oil market is changing structurally both from the demand and the supply side,” reports cited Jihad Azour, director of the IMF’s Middle East and Central Asia Department, as saying in an interview.
He suggested a shift in development plans to spending and job creation from governments to private businesses and the pursuit of more non-oil sources of income, and more quickly.
GCC countries would have to be more aggressive in their pursuit of an economic transformation to preserve their current wealth. "If we stop here, it's not enough," Azour said, adding that international oil companies and producing states have come together to improve energy and find alternative energy sources.
IMF said while Gulf producers like Saudi Arabia and the United Arab Emirates are developing new industries in preparation for a post-oil era, they're not moving quickly enough to avoid running out of cash.
Despite patchy reforms, they haven't fully offset the drop in oil revenue with spending cuts, leading to deficits that have eroded wealth, according to the report.
Regional governments will likely need to cut spending further, save more and introduce broad-based taxation to make ends meet, the IMF said.
A further decline in oil prices this year, in the face of geopolitical tensions and threats the coronavirus poses to growth, is making that task 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, according to the fund.
"The world's demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades," the IMF said.
Global oil demand is likely to peak around 2041 at about 115 million barrels a day and gradually decline from there, according to the report. While that forecast is firmly in line with most industry estimates, some, including the IMF, see potential for oil use to permanently decline even earlier.
Saudi Aramco, citing forecasts from oil industry consultant IHS Markit Ltd, said in its initial public offering prospectus last year that oil demand could peak around 2035. Improved energy efficiency or the imposition of a carbon tax by governments worldwide could bring oil’s demand peak forward to as soon as 2030, the IMF said.
Saudi Arabia, the UAE and Kuwait are the biggest producers in the GCC and are all Opec members. Risks differ for the GCC states, which also include Qatar, Oman and Bahrain.
The IMF’s outlook offers a broad timeframe in which global oil demand might crest. Revenue may not peak until the middle of the century and Gulf producers could see demand for their oil sustained from other quarters.
Increased use of oil for petrochemicals might help mitigate the slowdown in demand, the IMF said. Even as oil demand peaks, the lower costs of production will allow Gulf states to gain market share over rivals elsewhere.