Editor’s letter: How weak oil prices could impact Qatar’s economy

There is an English-language saying of obscure origin, but that many believe is Chinese: “May you live in interesting times.” One could think of many eras fascinating enough in which to exist. But, arguably, there is no time like the present, where the twin threats of depressed oil prices and potential global recession - even looming depression, if the most pessimistic analysts are to be believed – threaten economic growth in many countries, though for different reasons.

The fact that the Chinese devalued their currency by two percent against the United States (US) dollar in mid-August may or may not be related to the origins of the above phrase, but what is sure is the direct effect it had on the world economy, including China’s own beleaguered stock market.

The action by the Chinese also caused increased uncertainty in markets across the globe resulting in notable declines in the US, European, Asian and Australian bourses. The pressure was felt in countries with strong trade ties with China, manifest in a sharp devaluation of a cluster of emerging market currencies, including the Russian rouble, the Brazilian real and the South African rand.

Most analysts agree the Chinese are taking drastic steps to bolster their flagging economy, which has been a driving force in global recovery since 2009. But the effect of the current slowdown, when viewed through the prism of depressed energy prices, becomes even more acute for oil and gas exporting nations, many of whom have relied to some degree on Chinese growth in recent years.

Twin threats of depressed oil prices and recession threaten global economic growth.

Of course, neither the Chinese slowdown and market crash, nor their fiddling with the value of the Renminbi are wholly responsible for the low oil price – which dropped below the USD40 (QAR146) benchmark price in the US on August 21, to reach a six-year low – but it does not make an uncertain situation any better. No, a glut of oil on the market in a period of low demand (and the refusal by the Saudis to reduce production), growing supply from North Africa – and potentially Iran, post-nuclear deal – and the attributable effect of shale fracking in North America, and increasingly elsewhere, bear most of the responsibility for that.

Regardless of the origins of the status quo, there is the harsh reality for oil and gas exporting nations that rely on these for the majority of their gross domestic product (GDP) and income for state budgets. Due to the current low oil price – arguably unthinkable even a few years ago in the heady days of USD100 (QAR364) or more a barrel – they have had to redefine their fiscal policies drastically.

Such is the urgency of this for many Gulf Cooperation Council (GCC) states, including of course Qatar, that budget deficits are due to be posted, for the first time in more than a decade, in 2015. The state budget for Qatar has thus been revised from what was previously considered a conservative baseline of USD65 (QAR237) per barrel of oil, to USD45 (QAR164) – though some financial analysts and industry insiders believe the oil price may drop even lower this year, rising inexorably post-2016. However, instead of following Qatar’s approach, the United Arab Emirates (UAE) has embarked on, or advocated, other cost cutting remedies, including deregulating domestic fuel prices by removing state subsidies and setting fuel prices based on global benchmarks. The UAE is also considering introducing forms of taxation, such as Value Added Tax (VAT), as well as other corporate and remittance taxes to counter low energy prices, triggering debate in the region about how taxation such as VAT can only really work if implemented across the GCC.

Nevertheless, with Moody’s estimating that fuel deregulation could contribute at least 0.4 percent to the UAE’s GDP - more if the oil price rises again – this approach seems sound, the potential effect on inflation and consumer spending notwithstanding. Other Gulf fuel-subsidising countries, including Qatar (which has the second lowest global fuel pump prices behind Saudi Arabia) will be watching the outcome with keen interest.

The current oil price situation is clearly an unprecedented challenge for Gulf nations, who have enjoyed a long period of high energy prices, budget surpluses and growing demand for their exports. Fortunately, doomsday sages aside, most observers believe that these low prices will soon begin to rise and this current time of alarm will pass.

Whatever happens, to reference another quote said to be Chinese, it is arguably wise for all living in the region to “be frugal in prosperity, fear not in adversity”. Interesting times, indeed.