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UAE seen as GCC nation best able to weather oil crash, coronavirus

Highlights

OPEC's third-largest producer has financial assets estimated at $1.4 trillion

UAE has unveiled GCC's biggest stimulus package

Oman is most economically vulnerable GCC country

Dubai — The UAE, with assets estimated at around $1.4 trillion, is the Gulf country best equipped to weather the crude price crash and economic repercussions of the coronavirus outbreak, which is costing Arab oil exporters $550 million in lost net oil revenue every day, economists told S&P Global Platts.

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The UAE has one of the most diversified economies in the six-member Gulf Cooperation Council. It has introduced the region's biggest stimulus package of dirhams 126 billion ($34 billion) and lowered interest rates in line with US Federal Reserve moves. The other GCC countries are Bahrain, Saudi Arabia, Kuwait, Oman and Qatar.

The UAE is OPEC's third-largest oil producer, and is home to the world's third largest sovereign wealth fund, Abu Dhabi Investment Authority with assets estimated at $697 billion, according to the Sovereign Wealth Fund Institute.

"The UAE looks generally better positioned given larger buffers and will likely sustain spending, while Bahrain and Oman stand out as more vulnerable given already wide deficits, lower level of reserves and higher debt levels," Maya Senussi, senior Middle East economist at Oxford Economics, said.

The UAE is forecast this year to post a fiscal deficit of 2.7% of GDP, the lowest among all GCC countries, which are all set to suffer from budget shortfalls, according to Oxford Economics.

"The country's large-scale wealth buffers at $1.4tn (335% of GDP) fundamentally supports financial soundness and which can be utilized to handle lower oil prices for a protracted period," Ehsan Khoman, head of MENA research and strategy at Japan's MUFG Bank, said in a March 16 report.

Financial buffers

Qatar and Kuwait, which also have big sovereign wealth funds, will also benefit from their large assets.

"Kuwait, the UAE and Qatar are well placed to weather the economic fallout from the coronavirus and oil price crash because of the large financial buffers (largely in the form of Sovereign Wealth Funds) which could be used to finance the resulting large deficits and finance stimulus packages," Garbis Iradian, chief Middle East economist at the Institute of International Finance, said.

"The announced stimulus packages in Qatar and Saudi Arabia are adequate. The UAE and Kuwait, with large financial resources, can and should increase their stimulus packages," Iradian said.

The outbreak of the coronavirus, which has all but stopped economic activity in most parts of the world, and the oil price crash are taking a toll on the region's economies and Arab oil exporters as a whole.

United Nation's Economic and Social Commission for Western Asia estimates the Arab region has lost nearly $11 billion in net oil revenue from January to mid-March.

"At the prevailing oil prices, the region loses nearly $550 million every day, and the gains of oil importers within the region are negligible compared with the losses of oil exporters," it said in a March 18 report.

The Arab region as a whole is expected to lose at least $42 billion in GDP this year in an initial estimate, it said.

Widest deficit

Saudi Arabia, the world's biggest oil exporter, will post the widest deficit in the Gulf region this year after starting the oil price war by cutting April prices and planning to pump at record levels next month.

The kingdom is forecast to post a fiscal deficit of $79 billion in 2020, according to MUFG estimates. That deficit level was last reached in 2016, when oil prices tanked to below $30/b, prompting Saudi Arabia and Russia to forge the OPEC+ alliance at the end of that year.

With all GCC countries set to post fiscal deficits, they may have few options in plugging the shortfall.

"Given the ongoing financial crisis, the debt overhang of around $500bn in the GCC will make it increasingly difficult for sovereigns and corporates to finance their deficits through borrowing as access to banking and financial markets will become more difficult and expensive," Nasser Saidi, president of Dubai-based consultancy Nasser Saidi & Associates, said.

This is particularly true for Oman, the Middle East's biggest oil producer outside OPEC.

Oman, which is a member in the OPEC+ alliance, is the least equipped Gulf country to weather the economic crisis and the oil price crash, according to economists.

The country's sovereign credit rating is rated junk by ratings agencies S&P Global Ratings, Moody's and Fitch.

"Oman remains, by and large, the weakest link in the GCC region given its dwindling balance sheets, negative credit dynamics and public debt now already greater than the total assets of the sovereign wealth fund," Khoman said. "We remain acutely cognizant that with Oman's high fiscal breakeven oil price ($88/b in 2020), the country's outlook remains vulnerable to oil price declines."