The Future and Correlation Extent with Oil and Gas

An International Monetary Fund’s report stated a few weeks ago that the Gulf countries may lose their savings by 2034 with some before that date and others after. Last week S&P Agency estimated that Gulf banks might lose two degrees of their long-term credit rating because a percentage of their loans is linked to the oil and gas sector, both of which seem to be gradually losing their importance.

None of the reports brought anything new; in fact, they are late in their conclusions as warnings preceded them more than two decades ago. The government even has had an old similar report since July 1987, another report by Mackenzie, reports of the government track committees in the 1990s, “Tony Blair’s Report” in the first decade of the current millennium, then Mackenzie’s report for the Northern Economic Region (Kuwait), and many other warnings to the same effect.

The two recent reports above warn against the Gulf countries’ continued dependence on oil and gas at a time when the environmental and technical progress fears are on their way to weaken the importance of fossil energy sources, which means weaker demand and lower prices, while public expenditures are financed mainly by their sale revenues.

IMF report, out of specialization, is more comprehensive and focuses on repeated warnings, i.e. the financial structural imbalance, or the inability to diversify public finance financing sources away from oil, which the Gulf States suffered from at varying degrees in the 1980s and 1990s.

S&P’s report, albeit using the same approach, is only concerned with a part of its specialty, or the classification of banks subject to its classification. It links their likely weak rating in the future with the degree of their loans’ linkage with the energy sector. Although the Agency differentiates between one country and another in terms of their involvement percentage in financing the energy sector. The report estimates that the banking sector’s involvement in both Saudi Arabia and Qatar is directly related to the sector’s financing obligations by about 15% of their portfolios. In Kuwait and the UAE, the involvement is up to 10%. It, however, returns to comprehensiveness when it links the difficulties faced by all banking sectors with the indirect impact, i.e. the indirect influence of all other borrowers by the scarcity of oil and gas revenues together with the government’s role overall its other financings, whether they are real estate, retail or private institutions.

The importance of these two reports is not in their conclusions but in two other dimensions. The first dimension is that they, contrary to their previous reports which cover the short to medium terms and conclude the solvency of the financial position of most of their countries. This time they directly warn of the dangers of the economic future. We have repeatedly warned against the error of reading their financial reports’ conclusions. The other dimension is that they are reports rather than causing panic and the inability to act properly, but state that there is still time. We should take advantage of the warning and stop consuming the too little time remaining in the debate about whether taking necessary action or not, or act promptly to have real development. Just as a reminder, Kuwait has two completely contradictory projects one of which is consistent with the concerns of the two reports but the other is an incomplete contradiction and calls for more involvement with oil at about US$ 450 billion cost to increase production capacity to 4 million barrels/day, Kuwait should decide its course.