John Everington: A payoff for GCC economies came at the end of 2016, but more hard work lies ahead

The high oil prices that have sustained the Arabian Gulf economies for many years are now a thing of the past, with the longer-term impacts on local economies only gradually becoming clear.

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As they prepare to see in the new year, ministers of finance throughout the Arabian Gulf will no doubt be nodding in Russia’s direction.

The deal three weeks ago by Russia and other non-Opec oil producers to cut output, in coordination with a similar Opec agreement in November, was the first such coordinated move in 15 years, promising a much-needed uptick in oil revenues for producers after more than two years of depressed prices.

But governments are under no illusion; the high oil prices that have sustained the Arabian Gulf economies for many years are now a thing of the past, with the longer-term impacts on local economies only gradually becoming clear.

While Saudi Arabia’s bold National Transformation Program dominated regional headlines, 2016 was a year that saw cuts and consolidation throughout the region, as governments moved to trim budget deficits brought on by lower oil prices.

The year began amid a sharp cut in fuel subsidies in Saudi Arabia, Qatar, Bahrain and Oman, following a lead set by the UAE in the summer of 2015, accompanied by a series of rises in the price of water and electricity throughout the region.

Such subsidy cuts, due to continue throughout the region in 2017, will see business costs rise, with the risk of a backlash in some countries. In October, Kuwait’s cabinet resigned after MPs furiously protested fuel-prices increases of up to 80 per cent.

Perhaps more significant were early moves to tackle the region’s ballooning public sector wage bill. Saudi Arabia’s King Salman announced a suspension of all annual bonus payments for state employees in September, alongside a 20 per cent cut in government minister salaries.

The move came a month after Sheikh Mohammed bin Rashid, Vice President and Ruler of dubai ordered the retirement of nine senior officials at Dubai Municipality, the day after finding them absent from their desks at an unannounced morning visit.

Such cuts however are dwarfed by the impact of lower oil revenues on the region’s private sector, with hiring freezes, salary freezes and layoffs at some of the region’s biggest employers, including Qatar Petroleum, Qatar Rail, Adnoc and Etihad Airways.

With the cuts has come consolidation across a series of sectors in the region, as governments take the opportunity to streamline their economies in times of downturn, with Abu Dhabi and Qatar taking the lead.

Abu Dhabi’s government ordered the merger of state investment funds Mubadala Development and International Petroleum Investment Company (Ipic) in June, creating a fund with around US$125 billion worth of assets.

Earlier this month, FGB and NBAD shareholders approved a merger of the two Abu Dhabi banks, in a move that will create one of the Middle East’s largest bank by assets, potentially surpassing Qatar’s QNB.

This month also saw the announcement of a long-anticipated merger of the Qatari LNG giants Qatargas and Rasgas, with a view to cutting costs while creating a more competitive entity.

The announcement was followed by news of a potential three-way tie up between Masraf Al Rayan, Barwa Bank and International Bank of Qatar, welcomed by analysts as reducing the number of banks in an oversupplied market.

After a painful 2016, the cuts announced by Opec and non-Opec members offer some blessed relief to Arabian Gulf coffers in the coming year; earlier this month, Goldman Sachs raised its 2017 forecast for Brent crude futures to $59 a barrel, compared with an average of $45.06 for 2016. But the additional revenues are only likely to bring so much relief; Goldman’s $59 figure still falls well short of the $66 a barrel the IMF has forecast as the average price for GCC states to present a balanced budget.

The prospect of higher oil prices brings a little more comfort and predictability back to economies and markets after a long period of uncertainty over how low revenues could go.

But the commitment by all of the region’s governments to further fiscal consolidation and restructuring in 2017 means that the pain of the past 18 months is unlikely to abate any time soon.

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