The sharp drop in the oil price in 2014 forced the GCC countries to reform their economy and rethink their social contract. While some countries have already implemented significant reforms and reduced their reliance on oil, the pace of reform and efforts to diversify vary from country to country. 


  • The 2014 oil price collapse came as a shock to all GCC countries.
  • Economic performance has been mixed depending on how they have dealt with this.
  • Booming oil revenue led to increased government expenditure, which was difficult to adjust once oil prices collapsed.
  • Oman and Bahrain in particular have struggled to implement fiscal consolidation.
  • In all countries consolidation was mainly implemented through expenditure cuts. Revenue generation remains limited.
  • Diversification of the economy still has a long way to go in most countries and will be a long-term process.
  • It remains to be seen whether the pace of reforms will be continued in case the recent hike in oil prices persists.
  • Regional tensions have been rising and with the boycott of Qatar they have led to a split within the GCC.


The Gulf Cooperation Council is a group of six oil exporting countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – which formed a regional intergovernmental political and economic union in 1981. This union aims to expand the economic ties between its members. In 2008 a common market was launched and discussions about the introduction of a single currency were started.

The six countries show similarities in terms of their economy and how they are governed. Nevertheless, the differences have become greater over time, especially since the collapse of oil prices in 2014, which has had a significant negative effect on the economy and on external and public indebtedness. While Qatar and the United Arab Emirates have dealt quite well with the drop in the oil price, Oman and Bahrain have struggled to implement significant fiscal consolidation. 

Currently we are seeing increasing regional tensions in the MENA region, with the boycott of Qatar leading to a split within the GCC.

This article provides an overview of the economic situation in the GCC countries with a focus on public finances since the boom in oil prices in 2009 and highlights the challenges that the countries are currently facing.

Booming oil revenue followed by a bust

The rapid recovery of oil prices (after their sharp drop in 2008) had a strong positive impact on the fiscal and external balance of all six countries. The oil prices remained high until the end of 2014 when they collapsed (in this article, we refer to the period between 2009 and the end of 2014 as the “oil price boom”). They averaged USD 95.3 in the period between mid-2009 and the end of 2014, and have dropped to an average of USD 50.3 in the period since then, as shown in graph 1. While the oil price started to rise again in May 2018, it remains to be seen whether this increase will persist.

The high oil price resulted in large current account and fiscal surpluses. 

Graph 2 shows how the public revenue rose by around 50% in the period of the oil price boom compared with 2006. The increase in public revenue, however, also led to a steady increase in government expenditure. The reason is that most countries used the oil price windfalls to expand their welfare system, increase public employment and initiate large-scale investment projects. Additionally, public spending increased due to the region’s strong population growth.

Two important underlying factors play a role in the increase in government spending: first of all, the fear of spillover effects from the 2011 Arab Spring and secondly the lack of a medium- to long-term fiscal framework. While Bahrain was the only GCC member where large-scale protests erupted, there was a real fear among the Kings and Emirs in the other GCC countries that the protests would spread to their countries. Therefore, almost all countries responded by increasing transfers to their population. A second element is that almost no governments in the GCC had a medium- to long-term fiscal framework in place during the oil price boom. Spending was mainly on an annual basis without taking multi-year targets into account. The result was that the size of the government in the economy expanded significantly in most GCC countries during the oil price boom.

Nevertheless, even though public spending increased during the oil price boom, the government surpluses remained large in most countries. The surpluses were used to expand the sovereign wealth funds or foreign exchange reserves held by the central bank. During the oil price boom, mainly Qatar, the United Arab Emirates and Kuwait strongly expanded the assets in their sovereign wealth funds. This was also the case in Oman, although to a more limited extent. Saudi Arabia mainly expanded its gross foreign exchange reserves. Bahrain did not run a fiscal surplus during the oil price boom, given that the rise in its public expenditure more than offset the rise in revenue. The Arab Spring protests that erupted in Bahrain and the associated crackdown played a role in this.

Naturally, the oil price boom also led to large surpluses in the current account balance. The global current account surplus peaked in 2012 (at USD 390 bn). During the same period, imports – driven by a large public investment programme – also increased strongly. In Saudi Arabia, for example, total current account payments rose yearly by around 10% during the period 2010-14, mainly driven by the strong rise in the import of goods.

When the oil price collapsed at the end of 2014, this came as a huge shock to all the GCC economies. The total GCC public revenue dropped by almost 35% in 2015 and the large fiscal surplus became a USD 33.86 bn deficit.

In order to fund this large deficit, most countries initially drew upon domestic sources in 2015. They used the foreign exchange reserves, withdrew deposits at local banks and issued local bonds. As of 2016 the funding came mostly from external sources. Saudi Arabia, for example, entered the international bond markets for the first time in October 2016, when it collected USD 17.5 bn. Up to that point it had mainly relied on its reserves. All other GCC countries have also issued international bonds. Additionally, Oman has, for example, negotiated loans with China, the main buyer of its oil exports.

Mixed policy response to the oil price collapse

The collapse of the oil price forced the economies to rethink their economic model and implement significant fiscal consolidation. In most countries diversification was again placed high on the agenda. Nevertheless, there were major differences in the response to the lower oil price.

In Qatar and the United Arab Emirates the government implemented significant fiscal consolidation. This limited the government deficits after the oil price collapse to less than 4% of GDP. Compared to the other GCC member states, these two countries were better placed to deal with the oil price collapse given that their economy was relatively more diversified and they had built up significant buffers. For example, the United Arab Emirates partly used its assets in its sovereign wealth fund to finance its fiscal deficit.

Oman and Bahrain performed much worse in response to the drop in the oil price due to the government’s passive approach to the lower oil price. Oman ran only a small fiscal surplus during the oil price boom and this translated into a large deficit once the oil price decreased. It peaked in 2016 when it reached 22.4% of GDP. The case of Bahrain is similar; its government even ran a deficit during the oil price boom, which translated into a double-digit deficit once the price dropped.

In Saudi Arabia we saw a strong delay in the policy response. While the authorities initially remained passive and mainly relied on their foreign exchange reserves to fund the twin deficit, a clear strategy was formulated by 2016 under the direction of the newly appointed Crown Prince Mohammed bin Salman (MBS).

In all countries this led to higher public debt and external debt levels. This was especially the case in Bahrain given that this country had not built up reserves. The fiscal deficit was 18.4% of GDP in 2015 and was still 13.2% by 2017. This led to a doubling of the public debt to GDP ratio between the end of 2014 (44%) and the end of 2017 (90%). In the coming years government debt is expected to rise further to 111% of GDP by the end of 2020.

The deterioration of public finances and the build-up of external debt resulted in all GCC countries being downgraded by at least one notch for the medium-/long-term political risk classification since the drop in the oil price (see graph 3). However, Oman has been downgraded by three notches since then (each year since 2015) and Bahrain was downgraded by two notches in 2016.

The fiscal consolidation in the GCC countries was mainly implemented through expenditure cuts while revenue generation has been modest. The current consolidation effort is similar to previous consolidation episodes in the region in the 1980s and 1990s in the sense that they have always focused more on reducing government spending and less on government revenue. A key reason for this used to be the underdevelopment of the taxation system and the narrow tax base, which made it difficult to increase tax revenue, two factors that persist today (although to a lesser extent).

In all GCC countries some form of public wage freeze and employment freeze was implemented. All countries also reduced energy subsidies, but only the United Arab Emirates removed them completely. There was also an impact on public investments in the region, given that a large number of low-priority projects were put on hold. On the revenue side measures have been more limited. A positive development was the decision to introduce a GCC-wide value added tax (VAT). This 5% tax is planned to be implemented in all GCC countries. Saudi Arabia and the UAE were the first to implement the tax in January 2018, and the other countries are expected to follow by the beginning of 2019. Nevertheless, while it is a significant development for a region that has an odd relationship with taxes, the VAT still has a number of loopholes and exceptions, which risks limiting the tax receipts generated by the measure. Another measure generating fiscal revenue is the decision to privatise a number of state companies. This is especially high on the agenda in Saudi Arabia. They plan to sell stakes in a large number of state-owned companies including the state oil company Aramco.

Due to the size of the government in the GCC countries and their dominance in the economy, fiscal consolidation has had a stronger effect on GDP growth compared to other countries. This is due to the fact that economic growth in general, but especially non-oil growth, is more strongly correlated to government spending than in other countries. While growth was around 5% during the oil boom, it more than halved to 2.2% in the period 2015-17. Oman and Bahrain noticed only a small drop in growth given that they implemented only very limited fiscal consolidation.

Diversification and further reforms will take time

While diversification is again placed high on the agenda, it will still take a long time for the diversification and reforms to structurally change the economy of the region and lead to significant alternative revenue sources in the six countries.

When we assess the share of government revenue arising from hydrocarbon receipts, we can see that for Bahrain, Kuwait, Oman and Saudi Arabia this represented more than 80% of the total government revenue during the oil boom (see graph 5). In the last three years it still represented almost 65% of total revenue, showing that the development of alternative revenue sources still has a long way to go. The United Arab Emirates and also Qatar in particular have performed better in this sense. During the oil price boom their hydrocarbon receipts represented on average 72% and 60% of government revenue respectively. This dropped to an average of 50% for the UAE and 40% for Qatar in the three years since the oil price boom.

When we look at the current account receipts we see that even with the lower oil price the share of hydrocarbon receipts represents around 60% of total export receipts for Kuwait, Oman, Qatar and Saudi Arabia. Only Bahrain and the UAE perform better here. Oil and gas represent respectively 15% and 32% of total current account receipts. For the first four countries this shows that oil will continue to be the main driver of the external balance in the coming years. The fact that the oil income represents a large share of fiscal income in Bahrain but only a small share of current account receipts is due to the fact that the government in the country is still relatively small. In this sense the country is an exception compared to the other GCC countries. Nevertheless, Bahrain’s relative diversification currently has not led to significant non-oil fiscal revenue.

A further question is related to the sectors on which the countries will focus in an attempt to diversify their economy. The two best performing countries in terms of diversification, Qatar and the UAE, succeeded in this by investing heavily in infrastructure. Both countries have significantly expanded their port capacity. This has made the UAE a major regional trade hub. Qatar has also invested heavily in this and has expanded its banking sector, something that Bahrain, with its offshore status, has been most successful in. Bahrain, Qatar and the UAE are all trying to expand their services industry. Already before the oil price boom, one of the main alternative sectors developed in Saudi Arabia was the chemical sector, which uses oil and gas as a primary resource, as explained in March. Given that hydrocarbon is still used as a primary resource, the price of exports remains strongly correlated with the oil price and therefore the receipts they generate remain subject to the oil price. With his recent diversification plan, the Saudi Crown Prince also plans to shift the focus on to the services industry, expand the country’s mining industry, develop tourism and develop a currently non-existent domestic entertainment industry. Oman has also stated that it plans to develop its tourism industry and expand its mining industry. The question is whether these industries will succeed in generating sufficient export receipts in order to reduce the importance of oil for the countries in question.

A focus of the further reforms will have to be the rebalancing of the role of the government in the economy, both as an employer and as a provider of services. Currently the situation is such that in most of the countries, people try to get government jobs given that, compared to the private sector, these jobs pay better and because working conditions are easier in the public sector. The result is that the population is less willing to work in the private sector, which means that often all state employees are nationals while almost all private workers are foreigners. In Saudi Arabia, for example, two thirds of the population works in the public sector and wages in the public sector are on average more than 150% higher than in the private sector. In other GCC countries the IMF estimates this surplus to be even higher (245% in Kuwait, 229% in Bahrain). Additionally, public-sector jobs are often used by the government as a way of limiting unemployment in a region marred by high unemployment, a policy that doesn’t work in practice. As a consequence of this the region spends a disproportionate share of its public revenue on public wages while at the same time the quality of public services such as health and education has remained significantly below that in peer countries.

Pressure on social contract

A key issue for the GCC region will be how to balance these reforms without inciting protests among the population. Until now the political situation has been characterised by limited political freedoms but a buoyant welfare state with large transfers and almost no taxation. Reforming this “social contract” risks sparking protests, notably in Kuwait, Oman and Saudi Arabia. This is especially a risk given that a number of these countries are already dealing with discontent over the often high level of youth unemployment, corruption and the lack of social and political freedoms.

In Oman, we are seeing that even though reforms have been very limited, they have already led to protests, which also focus on the high unemployment rate and frustration with corruption in the country. These protests worry the government, particularly given that the country will soon be facing a leadership transition. Therefore, the risk is that the government will further slow down the already slow pace of reform or even postpone it further. In Kuwait we are also seeing that the government is hesitant to introduce major reforms in order not to spark protests. Additionally, the government in Kuwait has to deal with a parliament dominated by popular parties that are critical of a large number of the proposed reforms, resulting in reforms being introduced with excessive caution. For example, when water and energy prices were increased in 2016, the price rises only applied to businesses and foreigners. Moreover, the government has promised in the past not to introduce any individual taxes.

The risk is that once the country imposing the reforms notices more opposition from the population, it may back down from imposing the reforms. This happened, for example, in Saudi Arabia in April 2017 when financial allowances for civil servants and military personnel were restored after they were previously slashed in September 2016. The cuts were widely unpopular among the population and even resulted in calls for protests, which are uncommon and banned in the country. Nevertheless, MBS continues to be committed to the reform plan for the Saudi economy. To make the reforms easier to swallow for the population, he seems to have chosen to increase social freedoms, which were previously heavily restricted. We should view the restrictions he imposed on the much-hated religious police and his decision to allow women to drive and to allow cinemas in this context. His recent anti-corruption purge was also a way of showing the country that not only do his reforms have an impact on the population, but he also plans to deal with the country’s elite (besides being a way of consolidating his grip on power).

Nevertheless, all reforms implemented in the GCC countries will involve a careful balancing exercise.

Business environment remains difficult

Besides the aspects already discussed above, all GCC countries are characterised by a difficult business environment. This is due to a number of different factors, depending on the country.

Using the World Bank Ease of Doing Business Index as a metric, we see that the United Arab Emirates scores relatively well (21st place in the world ranking) while the other countries score significantly lower (Bahrain 66th place, Oman 71st, Qatar 83rd, Saudi Arabia 92nd and Kuwait 96th). When the subscores are assessed we see (unsurprisingly) that all countries (except for Saudi Arabia) score very well in terms of ‘Paying taxes’ but they all score particularly badly in terms of ‘Getting credit’, ‘Resolving insolvency’ and ‘Trading across borders’. Contract enforcement is also an issue in most GCC countries. In this sense the region is considered to be a very difficult business environment for debt collection. While a large number of factors play a role here, the slow functioning and complexity of the legal framework in most GCC countries play an important part, together with the lack of independence of judges in most countries.

Nevertheless, in the light of the recent reforms being introduced, we see that the countries are making progress in improving the business environment. In 2017, a long-awaited new bankruptcy law was introduced in the UAE. Besides changing the way in which the country dealt with bankruptcies and putting more focus on the early restructuring of distressed companies, the law decriminalised bankruptcies. The criminalisation of bankruptcies has in the past led to situations where businessmen try to leave the country as soon as their business is about to fail.
Other countries have also implemented reforms. Saudi Arabia has for instance eased limits on the ownership of local stocks and relaxed the foreign access rules. Additionally, we see that the countries are bringing their rules on the local stock exchanges into line with international standards. In the case of Saudi Arabia this has facilitated inclusion in the MSCI Emerging Market Index (after Qatar and the United Arab Emirates joined in 2014). This is expected to lead to a rise in foreign investments, mainly in the form of portfolio investments. Realising the need to attract more FDI, Kuwait has introduced a Direct Investment Promotion Authority, which serves to encourage FDI into Kuwait. Moreover, it has streamlined the registration and licensing procedures for investors. Attracting FDI will be difficult, however, given that it scores worst among the GCC countries in terms of business environment according to the World Bank.
The difficult business environment has been one of the main reasons why Credendo has kept the GCC countries in category C for the commercial risk rating.

Mounting geopolitical tensions

The reforms implemented in the GCC come at a time when the whole GCC region is marred by increased geopolitical tensions, mainly arising from the heightened tensions between Saudi Arabia and Iran. Since he consolidated his power in Saudi Arabia, MBS has shifted the country away from the cautious foreign policy that marked the country in the past. Instead he has chosen a much more aggressive approach, especially towards Iran. Here he has received the support of the US administration, which has chosen to work much more closely with the Saudi government compared to the Obama administration, which kept it more at arm’s length. Both Iran and Saudi Arabia are struggling for regional dominance, something that is evident in Yemen, Iraq, Syria and Lebanon (with the attempted resignation of Prime Minister Hariri and Iran’s support for Hezbollah).

A direct consequence of this policy is the split within the GCC since the blockade of Qatar. The blockade started in June 2017 when three GCC members (Saudi Arabia, the UAE and Bahrain) together with Egypt chose to cut diplomatic ties with Qatar and block all land, sea and air connections. They accuse Qatar of sponsoring terrorism and of undermining the security of its neighbours. The underlying reason is Qatar’s support for the Muslim Brotherhood and its relatively good relationship with Iran. While the blockade is limited to a fiscal blockade which, for example, does not allow the import of Qatari products, there is no general prohibition to do business with Qatari companies and payments between the four countries and Qatar are not disrupted. While we expect the boycott to impact growth and public finances, the blockade currently does not have a significant effect on Qatari economic growth thanks to the support of the authorities. Currently we only see an impact on the country’s diversification strategy in the sense that, as stated before, Qatar has been heavily developing its infrastructure and banking sector. However, both sectors are now cut off from their regional clients.
It is unlikely that we will see tensions subside during 2018. Instead a further heightening of tensions is expected.

Road ahead

As discussed, the GCC countries have implemented significant fiscal consolidation and this has improved the fiscal balances of most countries in the region. The regional current account balance has again become positive (USD 30 bn surplus in 2017) due to cuts in capital spending, which reduced imports, and also due to the recent increase in the oil price.

Nevertheless, while most countries seem more committed than ever to diversifying their economy, it is necessary to maintain the pace of reform. At the same time, reforms will have to be implemented in such a way that the impact on economic growth and employment is mitigated. Qatar, the UAE, Saudi Arabia and Kuwait have the financial resources to continue the reforms at a more gradual pace, which is why growth is expected to recover slightly in 2018 in these countries. Additionally, consolidation has already lowered fiscal and external hydrocarbon breakeven prices. The significant financial buffers also allow the countries to support the currency pegs, which for all countries remain an important anchor for economic and financial stability. 

For Bahrain and Oman the economic situation is more critical. Bahrain urgently needs to reduce its public deficit. The combination of high public debt, the lack of structural reforms, continued large fiscal deficits and the major refinancing needs over the coming years are undermining the credibility of the government and if no reforms are implemented, this risks leading to a confidence crisis. Given the very large banking sector, a loss of confidence would be disastrous for the economy. Given that Credendo currently does not expect this risk to materialise, the country’s medium-/long-term political risk classification is kept in category 5/7, but this rating is under pressure. The fact that Bahrain remains marked by capital outflows has put pressure on the foreign exchange reserves (which currently only cover 1.4 months of imports) and thus on the currency peg with the US dollar. This situation continues to put pressure on the country’s short-term political risk outlook, which is currently in category 3/7. Oman also needs to reduce its fiscal deficit but on top of that, the country will need to reform its economic model in order to make the economy less dependent on oil. For this aim especially, Oman will need to implement deep fiscal reforms to its economic model; compared to Bahrain it has much further to go in terms of diversification. Given that the country’s medium- to long-term political risk classification was downgraded (to 5/7) in October 2017, no further downgrade of the classification is expected for the moment. Nevertheless, the short-term political risk classification (still in 2/7) remains under pressure. If Bahrain and Oman do implement significant adjustments to their public spending, we expect this to put pressure on growth but it will, however, support long-term growth.

The important question for all the GCC countries is whether they will continue the reform dive if popular discontent with the reforms grows or if the recent rise in oil prices would continue. Especially a persistent higher oil price would tempt countries to switch back to their policies as before the oil price collapse, given that it would ease the short-term need to implement fiscal consolidation and the need to restore the external balance. This remains, however, something that will only become clearer with time.

Analyst: Jan-Pieter Laleman –