IMF predicts Gulf region's $2 trillion wealth at stake in peak demand scenario

The Gulf region's $2 trillion of government financial wealth could be gone by 2034 if current fiscal measures persist and global oil demand peaks around 2041, the International Monetary Fund said Thursday in a report.

"Global oil demand will peak around 2041 at about 115 million barrels a day and gradually decline thereafter as the demand-reducing effects of improvements in energy efficiency and increased substitution away from oil begin to dominate the weakened positive impact of rising incomes and population," the IMF said in a report, citing a benchmark projection.

Gulf states are particularly vulnerable to the peak oil scenario because they rely on crude to finance their budgets and save money for future generations. The slow pace of reforms means financial wealth could be exhausted in 15 years, the fund warned. Its peak oil scenario is based on an oil price of $55/b. Net financial wealth includes sovereign wealth fund assets, international reserves and government debt.

"The region's aggregate net financial wealth, estimated at $2 trillion at present, would turn negative by 2034 as the region becomes a net borrower," the fund said. "Total non-oil wealth would be depleted within another decade. This timeline would be brought forward in the alternative scenarios of faster improvement in energy efficiency and introduction of a carbon tax."

Gulf countries are trying to implement reforms and diversify their economies to lower dependence on oil income. Several countries have introduced taxes, including VAT and excise taxes, to shore up government revenue. They are also selling state assets and reinvesting the money back into the economy, while borrowing more from local and international debt markets to help finance their fiscal deficits.These reforms may be too little too late, according to the IMF.

Fiscal gap

"Should the peak in oil demand begin to materialize, net wealth in these countries would decline further in the coming years unless fiscal adjustment accelerates," the fund said. "The urgency of continued reforms is greater in countries with more vulnerable financial positions than those with larger financial savings (Kuwait, Qatar, UAE)." Saudi Arabia, Oman and Bahrain are also Gulf Cooperation Council countries

The fund recommended a three-pronged approach to resolve the fiscal dilemma facing GCC countries in a peak oil demand scenario: increase non-oil fiscal revenue, downsize governments and re-evaluate their approach to saving.

"The fiscal revenue GCC governments generate from the hydrocarbon industry (about 80 cents from a dollar of hydrocarbon GDP) is much higher than what is generated from non-hydrocarbon industries (about 10 cents from a dollar vs. 14½ cents globally)," the fund said. "Thus, even full replacement of the hydrocarbon industry with non-oil activity would still create a significant revenue shortfall."

Governments will also likely need to downsize, including reforming the region's large civil service and reducing public wage bills which are high by international standards, the IMF said. "Besides strengthening public finances, these reforms would also reduce labor market distortions and facilitate private sector development," it said.

Countries could also re-evaluate their approach to saving, with a greater focus on financial saving.