China virus threatens to hobble Gulf economies

Agence France-Presse

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China virus threatens to hobble Gulf economies


The 6 Gulf states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates – count China as their main trading partner and crude buyer

DUBAI, United Arab Emirates – The coronavirus crisis, which has already battered oil prices, threatens to further undercut Gulf economies battling a downturn and struggling to wean themselves from a decades-old energy addiction.

The 6 Gulf states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates – count China as their main trading partner and crude buyer, which soaks up about a fifth of their oil.

But China’s energy demand has sagged as authorities lock down millions of people in several cities to prevent the spread of the disease, now named COVID-19, that has killed 1,355 people so far.

The knock-on effects for a global economy that is dependent on a buoyant China – the powerhouse which accounts for one-third of the growth in oil demand – have seen prices sink to a one-year low.

Analysts believe the crisis, which the World Health Organization said this week spells a “very grave” global threat, will undercut the industry and dampen prices.

“There is no question that the virus is having a significant impact on Chinese oil demand,” Bill Farren-Price of Petroleum Policy Intelligence (PPI) told Agence France-Presse.

If the lockdowns continue into the year’s 2nd quarter,” he said, “then it starts to look more serious and will have deeper impacts on the real economy.”

Non-oil trade between Beijing and the Gulf Cooperation Council (GCC) has grown from just several billion dollars two decades ago to nearly $200 billion last year.

One industry that has taken an early hit is tourism.

Over 1.6 million Chinese tourists visited the Gulf states in 2018, most of them heading to glitzy Dubai, and the number had been rising fast. 

In recent weeks, however, Chinese visitors have been rarely sighted even in Dubai as airlines have suspended routes following the outbreak, threatening the ambitious tourism targets.

‘Double whammy’

The latest shock comes shortly after the International Monetary Fund warned that Gulf states must undertake much deeper reforms or risk seeing some $2.5 trillion in accumulated wealth drain away in 15 years as global demand for oil slides.

Oil income is highly sensitive to Gulf states as it contributes more than 70% of public revenues.

Since January 30, a month after the disease was discovered, oil prices have dropped by around 20%, slashing tens of billions of dollars from GCC revenues.

An oil price crash in mid-2014 had already seen public revenues dwindle and growth rates tumble, forcing borrowing and a drawdown on assets to plug budget deficits.

Major energy-producing countries, which had already cut production in an effort to revive the market, now face a “double whammy” of slumping prices as well as more fundamental economic trauma, said Ellen Wald, author of the book Saudi Inc.

“The declines, coming at a time of curtailed output, threaten economic shocks that, if long-lasting, could lead to the kind of political and regional instability that was avoided during the last steep drop,” she said in a Bloomberg news agency commentary.

‘Headwind to growth’

London-based research consultancy Capital Economics also warned that a prolonged impact from COVID-19 could trigger a major economic downturn.

“Fears about the coronavirus outbreak have weighed on oil prices and clouded the near-term outlook for the Gulf countries,” it said in a report.

“Lower oil prices and a possible deepening of oil production cuts will act as a headwind to growth in early 2020.”

As a result of the sharp decline in oil prices, a technical committee for OPEC and its partners last week recommended additional production cuts of 600,000 bpd to add it to the 1.7 million bpd of cuts already in place.

Russia is reluctant to commit, however, promising a decision soon.

Mohammed al-Sabban, a former senior Saudi energy ministry official, warned in an article in Okaz newspaper on Tuesday, February 11, that if the so-called OPEC+ group does not cut production quickly, Brent oil prices could slide to as low as $40 a barrel.

Wald noted that previous price shocks had occurred in 2015 and 2016 because producers were pumping as much oil as they could – a far cry from the current scenario.

“In the feared coronavirus scenario, producers such as Saudi Arabia, Russia, and the United Arab Emirates would face low prices in conjunction with lower production,” she said, hitting revenues and ability to deliver services.

“If the situation lasted long enough, economic instability could have political consequences.” –

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