Deutsche Bank
Research
GCC in times of cheap oil:
an opportunity for economic reform
and diversification
Kevin Körner & Oliver Masetti
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
GCC in times of cheap oil:
an opportunity for economic
reform and diversification
The Gulf monarchies are strongly dependent on oil exports to
cover fiscal and external expenditures and produce economic
growth. This makes the economies highly sensitive to the
substantial decline in oil prices since summer 2014. Budget
breakeven oil prices for all GCC countries except Kuwait and
Qatar now lie above current spot prices, translating into fiscal
deficits if current prices prevail in 2015.
However, major Gulf oil producers such as Saudi Arabia and the
UAE are well prepared to withstand a period of cheap oil given
their vast financial wealth in form of FX reserves and SWFs as
well as easy access to financial markets. This should allow
them to maintain public investment and keep economic growth
in positive territory.
In the medium-term, continuously cheap oil would put growing
pressure on GCC governments to reform public finances both
on the expenditure side (e.g. cut subsidies, public payroll) and
on the revenue side (increase share of non-oil revenues, raise
taxes). At the same time, this also provides an opportunity to
speed up long overdue structural economic reforms in order to
reduce overall hydrocarbon dependence.
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
1
Saudi Arabia has by far the largest population within
the GCC...
Population of the GCC
m, 2014
30
25
20
Kuwait
United Arab
Bahrain Emirates
15
Qatar
Saudi Arabia
Oman
10
5
0
Saudi
Arabia
UAE
Kuwait
Oman
Qatar
Bahrain
Source: IMF
Comparison to Germany: 81.1 m
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
2
... as well as the largest economy
Nominal GDP of the GCC
bn USD, 2014
800
700
600
500
Kuwait
United Arab
Bahrain Emirates
400
Qatar
300
Saudi Arabia
Oman
200
100
0
Saudi
Arabia
UAE
Qatar
Kuwait
Oman
Bahrain
Source: IMF
Comparison to Germany: 3,860 bn USD
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
3
But GDP per capita is highest in Qatar
GDP per capita of the GCC
USD, 2014
100,000
90,000
80,000
70,000
60,000
Kuwait
United Arab
Bahrain Emirates
Qatar
Saudi Arabia
50,000
40,000
Oman
30,000
20,000
10,000
0
Qatar
Kuwait
UAE
Oman
Saudi
Arabia
Source: IMF
Comparison to Germany: 47,590 USD
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
4
Demography and immigration add to socioeconomic
challenges
Massive immigration leading to...
...rapid population growth
Expatriates
Total population growth, % (2000-2014, cumulative)
100
10
80
8
250
60
6
200
40
4
300
150
100
20
2
50
0
0
Qatar
UAE
Bahrain
Kuwait
Oman
% of total population, left side
Saudi
Arabia
0
m, right side
See Deutsche Bank (2013): MENA 101 - The Basics
Sources: National authorities, Deutsche Bank
Deutsche Bank
Research
Sources: IMF, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
5
Oil wealth of the GCC
Amongst the world's top
producers*...
... and exporters of oil
mbd, 2013
mbd, 2013
Saudi Arabia
USA
Russia
Saudi Arabia
UAE
Russia
Kuwait
China
Iraq
Canada
Nigeria
UAE
Venezuela
Iran
Iraq
Qatar
Mexico
Angola
Kuwait
Canada
0
2
4
6
8
Source: U.S. Energy Information Administration (EIA)
10
12
0
14
2
4
6
8
10
Source: U.S. Energy Information Administration (EIA)
*: Total oil supply, including crude oil, NPGL, refinery processing gain, and other liquids
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
6
Oil wealth of the GCC
Decades of oil reserves for major GCC producers, less so for Bahrain and Oman
Thousand barrels per day
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Bn barrels
77.9
101.3
62.7
33.6
15.9
5.6
Bahrain United Arab
Emirates
Current production, left side
Kuwait
Saudi
Arabia
Reserves, right side
Oman
300
250
200
150
100
50
0
Qatar**
Oil horizon in years*
Sources: EIA, Deutsche Bank
*: Oil horizon is the number of years for which oil production can be maintained at current levels, relative to confirmed reserves
**: Qatar’s hydrocarbon reserves mainly consist of gas, which is estimated to last for another 161 years at current production (2012 data)
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
7
Underdiversified economies dominated by oil industry
GDP by economic activity (2011)
% of GDP, 2011
100%
80%
60%
40%
20%
0%
Kuwait
Qatar
Saudi Arabia
Oman
UAE
Mining and Quarrying
Manufacturing
Public Services
Trade, Hotels, Restaurants
Transport, Storage, Communication
Construction
Housing
Finance, Insurance, Banks
Bahrain
Other
Sources: Arab Monetary Fund, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
8
Strong trade integration, high exposure to world markets
GCC amongst the most open economies in the world
% of GDP, 2013
140
120
100
80
60
40
20
0
Exports, goods
Exports, services
Imports, goods
Imports, services
Sources: IMF, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
9
GCC economies defined by dependency on fossil fuels
Fossil fuels/exports
Fossil fuels/fiscal revenues
%
%
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Bahrain
UAE
Kuwait
Bahrain
UAE
Kuwait
Oman
Qatar
Saudi Arabia
Oman
Qatar
Saudi Arabia
Sources: IIF, Deutsche Bank
Deutsche Bank
Research
Sources: IIF, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
10
GCC economies defined by dependency on fossil fuels
Fossil fuels/GDP (nominal)
Fossil fuels/GDP (real)
%
%
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Bahrain
UAE
Kuwait
Bahrain
UAE
Kuwait
Oman
Qatar
Saudi Arabia
Oman
Qatar
Saudi Arabia
Sources: IIF, Deutsche Bank
Deutsche Bank
Research
Sources: IIF, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
11
Shift in global supply/demand over the last decade
US takes over as world's biggest
oil producer, ...
... and dramatically reduces
imports
Oil supply, mbd
Oil imports, net (supply-consumption), mbd
40
14
35
12
30
10
25
8
20
6
15
4
10
5
2
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
US
OPEC
Sources: EIA, Deutsche Bank
Deutsche Bank
Research
Saudi Arabia
Russia
China
United States
India
EU-27
Sources: EIA, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
12
Drop in oil prices substantially affects nominal GDP in
the Gulf monarchies...
Gross domestic product, nominal
% yoy (left)
50
120
40
110
30
100
20
90
10
80
0
70
-10
60
-20
50
-30
40
2007
2008
2009
Brent (USD/bbl, right)
2010
Kuwait
2011
Oman
2012
Qatar
2013
2014
Saudi Arabia
2015
UAE
2016
Bahrain
Sources: IMF, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
13
... but not so much real GDP
Gross domestic product, real (adjusted for price changes)
% yoy (left)
20
120
110
15
100
10
90
5
80
70
0
60
-5
50
-10
40
2007
2008
2009
Brent (USD/bbl, right)
2010
Kuwait
2011
Oman
2012
Qatar
2013
2014
Saudi Arabia
2015
UAE
2016
Bahrain
Sources: IMF, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
14
Low oil prices translate into: further shift to non-oil growth
Saudi Arabia
UAE
Kuwait
Real GDP, % yoy
Real GDP, % yoy
Real GDP, % yoy
10
10
20
8
8
15
6
6
10
4
4
2
5
2
0
0
0
-2
-2
-4
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
Deutsche Bank
Research
-5
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
15
Low oil prices translate into: further shift to non-oil growth
Qatar
Oman
Bahrain
Real GDP, % yoy
Real GDP, % yoy
Real GDP, % yoy
30
14
12
12
10
25
10
8
8
20
6
6
4
4
15
2
10
2
0
5
0
-2
0
-4
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
Deutsche Bank
Research
-2
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
05-07
Total
Hydrocarbon
08-10
11-13
14-16
Non-hydrocarbon
Sources: Haver Analytics, IMF, national
authorities, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
16
Low oil prices translate into: fiscal deficits in most GCC
countries, except Kuwait/Qatar
Budget breakeven oil prices
Fiscal sensitivity to oil prices
USD/bbl
2015 fiscal balance, % GDP
2015F
2014
30
Bahrain
20
S. Arabia
10
Oman
0
UAE
-10
Qatar
-20
Kuwait
-30
BHR
0
20
2015f
Source: Deutsche Bank
40
60
80
100
2014e
120
KWT
OMN
QAT
SAU
UAE
140
45 (Brent, USD/bbl)
60 (Brent, USD/bbl)
75 (Brent, USD/bbl)
90 (Brent, USD/bbl)
Source: Deutsche Bank
For more details see Deutsche Bank (May, 2015): Special Report - Adjusting to lower oil prices: budget breakeven thresholds
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
17
Low oil prices translate into: fiscal deficits in most
GCC countries, except Kuwait/Qatar
Fiscal balance
% of GDP
20
GCC
43,26
15
10
5
0
-5
-10
-15
-20
2005
2010
2015F
Sources: IMF, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
18
Low oil prices translate into: current account
deficits/substantially reduced surpluses
C/A breakeven oil prices
External sensitivity to oil prices
USD/bbl
2015 current account, % GDP
2015F
2014
30
Bahrain
20
S. Arabia
10
Oman
0
UAE
-10
Qatar
-20
Kuwait
-30
BHR
0
20
2015f
Source: Deutsche Bank
40
60
80
2014e
100
KWT
OMN
QAT
SAU
UAE
120
45 (Brent, USD/bbl)
60 (Brent, USD/bbl)
75 (Brent, USD/bbl)
90 (Brent, USD/bbl)
Source: Deutsche Bank
For more details see Deutsche Bank (May, 2015): Special Report - Adjusting to lower oil prices: budget breakeven thresholds
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
19
Low oil prices translate into: current account
deficits/substantially reduced surpluses
Current account
% of GDP
GCC
30
25
20
15
10
5
0
-5
-10
-15
-20
2005
37,32
2010
2015F
Sources: IMF, Deutsche Bank
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
20
Vast government wealth mitigates impact of low oil prices
Comfortable net external creditor
position
GCC SWFs amongst world's Top 20
bn USD
% of GDP, 2014
1000
300
900
250
800
200
700
150
600
100
500
50
400
0
300
-50
200
-100
100
-150
Kuwait
Saudi
Arabia
foreign assets
Qatar
external debt (-)
Sources: IIF, Deutsche Bank
Deutsche Bank
Research
UAE
Oman
Bahrain
0
net foreign assets
Sources: SWF Institute, Deutsche Bank
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
21
High creditworthiness mitigates impact of low oil prices
Germany
S&P
Moody‘s Fitch
AAA
Aaa
AAA
USA
AA+
Aaa
AAA
Abu Dhabi
AA
Aa2
AA
Qatar
AA
Aa2
AA
CDS spreads for 5-year
government bonds
bps (June 1st, 2015)
Germany
USA
Abu Dhabi
Saudi Arabia
Kuwait
AA
Aa2
AA
S. Arabia
AA-
Aa3
AA
Israel
A+
A1
A
Oman
A-
A1
NR
Kazakhstan
BBB
Baa2
BBB+
Colombia
BBB
Baa2
BBB
Bahrain
BBB-
Baa3
BBB
Russia
BB+
Ba1
BBB-
Nigeria
B+
Ba3
BB-
Deutsche Bank
Research
Israel
Qatar
Italy
Colombia
Dubai
Kazakhstan
Bahrain
Russia
Nigeria
0
100
200
300
400
500
Source: Bloomberg
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
22
Fixed exchange regimes prove stable against drop in oil
Saudi Arabia
3.8
3.75
3.7
3.65
3.6
05
06
07
08
USD/SAR
09
10
11
12
13
14
USD/SAR 12M Forward
United Arab Emirates
3.75
3.7
3.65
3.6
3.55
3.5
05
06
07
08
USD/AED
Source: Bloomberg
Source: Bloomberg
Qatar
3.75
3.7
3.65
3.6
3.55
3.5
3.45
3.4
05
Oman
0.39
09
10
11
12
13
14
USD/AED 12M Forward
0.385
0.38
0.375
0.37
06
07
08
USD/QAR
09
10
11
12
13
14
USD/QAR 12M Forward
05
Source: Bloomberg
Source: Bloomberg
Bahrain
0.38
0.378
0.376
0.374
0.372
0.37
05
Kuwait
0.32
0.3
0.28
0.26
0.24
0.22
05
06
07
08
USD/BHD
Source: Bloomberg
09
10
11
12
13
14
USD/BHD 12M Forward
06
07
08
USD/OMR
06
07
08
USD/KWD
09
09
10
11
12
13
14
USD/OMR 12M Forward
10
11
12
13
14
USD/KWD 12M Forward
Source: Bloomberg
Last observations: May 31, 2015
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
23
Disclaimer
© Copyright 2015. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite
“Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author,
which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions
expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for
informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness,
completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide
financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the
United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange,
authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number
150018) and by the PRA. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea
Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited,
Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this
report and consider the PDS before making any decision about whether to acquire the product.
Deutsche Bank
Research
Kevin Körner, Oliver Masetti
GCC in times of cheap oil: an opportunity for economic reform and diversification, June 2015
24