What Happened

The International Monetary Fund on Feb. 6 released the results of its study of the fiscal sustainability of the countries of the Gulf Cooperation Council (GCC), which do not bode well for the region in the 2030s. The study concluded that at their current fiscal stance, the GCC as a region would see its fiscal wealth turn negative in 2034 under a baseline real oil price scenario of $55 per barrel. Bahrain, Oman and Saudi Arabia are the three countries with the most exposure to oil price difficulties. In the study's baseline oil scenario, the debts of Bahrain's government would outstrip its assets in roughly the next five years, Oman would reach roughly the same point within a decade and Saudi Arabia would turn negative in roughly the next 15 years. With the GCC's strongest financial position, Kuwait would meanwhile not hit the negative wealth threshold until the 2050s under the same study conditions.

Why It Matters

The IMF's assessment fits Stratfor's long-term forecast for Saudi Arabia and the other GCC states. To make their financial positions more sustainable and save more of their financial wealth for future generations, the GCC countries are exploring ways to make significant fiscal adjustments, including structural economic reforms, to make economic growth more sustainable and diversified. They are also seeking revenue sources beyond oil extraction and planning how to drastically trim government spending. But political constraints have limited the pace of those reforms.

For example, Saudi Arabia has been willing to raise some taxes on the private sector in order to generate significant revenue, but it has not put into place significant enough reforms to help the private sector grow — leaving investment chiefly in state hands. The Saudi Aramco initial public offering in December was put forth essentially to increase the size of the Saudi Public Investment Fund, with much of the proceeds to be invested in boosting the economy and to pay for Saudi megaprojects, like the futuristic city of Neom. Those types of investments do generate short-term growth but are an inefficient way to use capital in the longer term, at least compared with investments such as in high-returning overseas assets.

Moreover, it is not clear that wealthy Gulf countries can find a sustainable economic model akin to the current oil-based one. Dubai has adopted a Singapore-like model based on trade and finance, but that option is not available to every country in the region, especially since it has proved only to work for small city-state entities, and would not be effective for large countries such as Saudi Arabia. 

Additionally, Saudi Arabia has thus far been unwilling to take the risk of stoking the social unrest that might accompany significant government spending cuts. Other GCC countries like Oman and Kuwait fall in the same category. These factors make it unlikely that those countries will be able to escape the fate laid out in the IMF report unless a major change in the global oil market occurs that increases oil prices.  

The Arabian Peninsula in the 2030s

Given current trends, there is a high probability that the region will experience a significant economic crisis during the 2030s, and perhaps even earlier in places such as Oman and Bahrain. Those crises would be marked by high levels of unemployment, creating anger at governments. That, in turn, would lead to social unrest that could certainly plant the seeds for extremist groups to more effectively recruit on the Arabian Peninsula and launch attacks in the region, although the GCC's militaries will retain their ability to cope with internal threats. This will force the GCC states to turn their attention inward and reduce their activities in the Middle East and North Africa.

The internal struggles of both Saudi Arabia and the core U.S. military partners in the GCC will offer opportunities for other countries in the broader region to play a more active role in their neighbors' affairs, reinvigorating some historical rivalries. For example, longtime rivals Turkey and Egypt as net importers of oil will not face the same financial constraints that the Arab monarchies will, allowing them to fill any vacuum left as the GCC states' involvement wanes. Though currently deeply dependent on oil exports, Iran meanwhile also has a more well-developed industrial and manufacturing base that will cushion its economy from the effects of a decrease in the importance of oil.