Analytical Brief n.7, January 2021

In 2020, the world has witnessed two powerful crises. One is related to the COVID-19 outbreak, which threatens to cause the largest recession in the global economy since the Great Depression. The other is related to the sharp decline in oil prices, which has hit the economies of the exporting countries particularly hard. These two crises are interrelated. The consequences of these crises for the members of the Gulf Cooperation Council (GCC) have once again put on the agenda a question: how can the leading Gulf states free themselves from dependence on oil and gas exports and what should be done to restructure their economies? Such a restructuring is becoming increasingly urgent, given the significant structural problems of the economies of the GCC member states.

These problems include:

- economic monoculture or unilateral dependence on oil and gas exports;

- lack of modern industry in the non-oil sectors;

- dependence on foreign labor; - the costs of the rent economy.

Decline in world oil prices and the recession associated with the COVID-19 pandemic have dealt a significant blow to the economies of the Gulf states. However, we must recognize that the leading GCC economies suffered less from the global crisis than the economies of other oil-exporting countries (Russia, Iran, Venezuela, Angola, Nigeria). The GCC states have accumulated solid reserves, allowing them to allocate significant funds to fight the pandemic and its economic consequences. In addition, in the GCC states the government is the main employer. Further we will discuss three GCC member states: Saudi Arabia, UAE and Qatar.

Saudi Arabia

Kingdom of Saudi Arabia (KSA) has the greatest economic potential among the GCC states. The kingdom is a member of the G20 and has the largest population in the Gulf region (34 million people). At the same time, according to some indicators the Saudis are coping worse with the economic crisis than their neighbors like Qatar and the UAE.

The KSA's economic problems began even before the pandemic and the collapse in the oil price. Back in 2019, the KSA's GDP growth was only 0.3 percent, and construction volume was down 25 percent from 2017. The KSA's foreign exchange reserves, which stood at $732 billion in January 2015, according to the Saudi Treasury, had fallen to $499 billion by December 2019. Saudi Arabia's per capita GDP, which was $25,243 in 2012, has fallen to $23,338. The KSA's net debt, currently at 19% of GDP, could rise to 27% in 2020 and to 50% by 2022, given the effects of the COVID-19 pandemic. Saudi Arabia's budget deficit is expected to be 187 billion rials ($50 billion) in 2020, equivalent to 6.4% of GDP. In the first quarter of 2020 alone, oil export revenues fell 24% and other revenues not directly related to the fuel and energy complex fell 17%. KSA economic losses should include the loss of income from the hajj (the annual Muslim pilgrimage to Mecca) in 2020. Between 10 and 15 million pilgrims visit Mecca each year. The projected revenue from the 2020 hajj was $8 billion.

This has forced Riyadh to cut budget spending not directly related to health care and economy stimulus during the pandemic. More than 80% of the budget is allocated to current consumption (subsidies for imports of food and vital goods), health care and supporting the economy during the crisis. Saudi government continues to pay public sector wages and finances various social programs as a necessary precaution to maintain social stability. These expenditures lead to the curtailment of ambitious projects, such as the construction of the city of Neom and support for tourism on the Red Sea. The 2020 budget was calculated on the projected oil price of $64 per barrel.

United Arab Emirates

The impact of the crisis on the economy of the United Arab Emirates has been mitigated by the greater diversification of its economy, but it has also been significant. In October 2020, the UAE government reduced spending by cutting the budget for 2021; the new budget is set at $15.8 billion (58 billion dirhams), down from $16.6 billion (61 billion dirhams) in 2020. At the same time, the 2020 budget was the highest in the state's history. UAE leaders remain optimistic about an economic recovery in 2021. UAE Prime Minister and Ruler of Dubai Sheikh Mohammed bin Rashid Al Maktoum noted that "The UAE economy will be one of the fastest to recover in 2021, and the government has effectively handled the 2020 budget."

Nevertheless, there are unfavorable trends, especially if one considers the economy of Dubai, long the locomotive of the UAE's development. These trends are already threatening key sectors that have fueled the economy over the past decade, including real estate, tourism, construction and financial services. As a result of the COVID-19 pandemic, services based on sustainable consumption, including bars, restaurants, cinemas and gyms, are also in decline. According to the Dubai Chamber of Commerce, up to 70% of these establishments will close by the end of 2020. Dubai's real estate market, which was overcrowded and in decline even before the pandemic, is facing a drop in rents and values. This is due to two factors: a) migrants and expats are moving back home and b) investors are avoiding making new acquisitions or entering into long-term contracts. According to some estimates, in the second quarter of 2020 alone Dubai rents declined 15%.

Dubai's tourism sector is also is crisis and so is air travel. The CEO of Emirates Airlines has noted that it will take at least 18 months before the company can return to the pre-pandemic operational level. Because of the coronavirus pandemic, the UAE authorities postponed the Dubai Expo 2020 exhibition to 2021, which left the country's economy short of $23 billion. The banking sector of Dubai is also experiencing hard times: the Emirates National Bank of Dubai, one of largest banks in the Middle East, showed a 45% drop in profits in the first half of 2020.

Under these conditions, Dubai is increasingly dependent on the neighboring more prosperous emirate of Abu Dhabi. Before the pandemic the Dubai Investment Fund (DIF - Sovereign Wealth Fund) had $239 billion in assets. However, a large share of these assets is in Dubai and their value is declining. The Dubai Sovereign Wealth Fund cannot cover its $88.9 billion debt to the UAE government, which could trigger another financial crisis. In exchange for financial aid, Abu Dhabi is likely to require significant political and economic concessions from Dubai. As a result, some of Dubai’s large-scale projects, such as Al Maktoum Airport, may be suspended, while others, such as the modernization of Dubai Creek Harbor, will be frozen.


The negative trends in Qatar's economy are less pronounced compared to its neighbors. This is due to the fact that the emirate's main source of income is not oil or tourism, but the export of liquefied natural gas (LNG). Qatari gas has a stable and increasingly expanding market. In 2019, Qatar's LNG export revenues were $45.3 billion, 62% of total export revenues ($73 billion). Since LNG prices are tied to the price of oil, they have fallen sharply since 2019. Qatar exports 77 million tons of LNG a year, but only 6 million tons is in spot markets for immediate delivery. Most of Qatar's LNG revenues are tied to medium- and long-term contracts and therefore are subject to the price fluctuation. Qatar exported 48 million tons of LNG to Asia in 2019, accounting for 70% of its sales. In April 2020, the price of Qatari gas was $10.12 per mmBtu (British thermal units) for Japan, $11.04 for South Korea and $10.44 for China. Another concern for Qatar is the fate of the 2022 FIFA World Cup to be held in Doha. The cost of building the necessary infrastructure and promoting the Championship is estimated to be around $200 billion. By comparison, the Championship in South Africa in 2010 cost $3 billion, in Brazil in 2014 - $15 billion, and in Russia in 2018 - $30 billion. The Qataris hope that not only they will be able to return their investment, but also make a profit. However, if the pandemic persists, the World Cup might not take place.

The structural problems of the GCC economies

The consequences of the COVID-19 pandemic and the decline in global oil demand are exacerbated by the structural problems of the Gulf economies. Even if the global economy begins to recover in the near future, the GCC states will remain in a vulnerable position. The economic decline in these states will continue, facilitated by a number of factors.

One factor is dependence on oil and gas exports, also known as the Dutch Disease . Leaders of the Gulf states are aware of the Dutch Disease danger and are looking for ways to diversify their economies, although not always successfully. The most elaborate version of such diversification attempt is the Saudi’s Vision 2030 program, announced in May 2016. The program spells out the main areas that, in theory, will create new sectors of the economy and free Saudi Arabia from dependence on oil exports. This program includes the following elements:

1) Creating a sovereign wealth fund by selling 5% of the country's largest state oil company Aramco. The proceeds from its sale should go to investment projects around the world.

2) Creating new jobs for Saudi citizens by supporting small and medium-sized businesses, offering Saudis those jobs that were previously reserved for foreigners, stopping illegal immigration. Skilled foreign workers will be legalized through the issuance of residence permits, the counterpart of American green cards.

3) Creating 90.000 jobs in the mining sector. Saudi Arabia has large reserves of mineable uranium ore, sufficient to start the domestic production of nuclear fuel.

4) Promoting tourism, primarily Muslim pilgrimage, but also secular tourism. The goal is to bring the number of pilgrims to Mecca from 9.5 to 30 million by 2030.

5) Creating its own military-industrial complex capable of replacing arms imports.

6) Creating modern infrastructure, including the "smart city" of Neom in the desert in the north of the KSA.

However, it is important to remember that the sale of Aramco shares has stalled for a number of reasons. One reason is the fall in global oil prices. Another is the ongoing Saudi involvement in the war in Yemen, which resulted in a rocket attack by Yemeni Houthi rebels on the Saudi oil installations in September 2019. This attack demonstrated the vulnerability of the Saudi oil industry. The October 2019, Aramco IPO was cancelled on the New York Stock Exchange partly because the Saudi government overvalued the company ($2 trillion). As a result, 2% of the company was sold on the Saudi Tadawul exchange to Saudi investors. The sale results fell short of expectations.

Another major problem GCC economies face is their critical dependence on foreign labor. Saudi Arabia employs 11.1 million migrant workers, or 76.7% of the total labor force. Foreign workers make up 69.3% in Kuwait, 73.5% in Bahrain, 80.9% in Oman, 90% in the UAE, and 94.4% in Qatar. Most foreign workers come from Egypt, Pakistan, India, Bangladesh and poorer Arab states. Gulf states are striving to gradually replace foreign workers with their own nationals. This is especially true in the KSA, which has a relatively large population (34 million), 60% of whom are under the age of 30. Increasing unemployment among Saudi youth could cause social unrest in the future. However, this process encounters a serious obstacle - the lack of professional skills and education among the natives of the Gulf states. This factor has become a serious obstacle to the implementation of the Dubai Industrial Strategy 2030, adopted in 2016. The strategy set a goal of a 1.5-fold increase in the new industrial output. Moreover, 50% of all country’s exports should be from the high-tech sector. However, it turned out that these objectives are hindered by the lack of a qualified well-trained labor force and limited opportunities to attract it.

There is another way to mitigate the economic risks of the Gulf states - profitable investments abroad that guarantee high incomes. The GCC states have sovereign wealth funds and investment funds designed for this purpose. The official figures of their accumulated wealth are impressive. The Abu Dhabi Investment Authority has $ 696.6 billion, Kuwait Investment Authority - $ 592 billion, SAMA Foreign Holdings (Saudi Arabia) - $ 505.7 billion, Public Investment Fund (Saudi Arabia) - $302 billion, Qatar Investment Authority - $320 billion, Mubadala Investment Company (UAE) - $ 228.9 billion dollars. However, in today’s circumstances, in order to maintain the current level of consumption and military expenditures, GCC states have to use these funds to balance their budgets.

The dysfunction in the financial sector is evidenced by the sharp increase in borrowing and debt over the past two years. In 2019, Gulf governments and corporate players borrowed a record $101 billion from the global financial markets via bond issues. Saudi Aramco sold $12 billion in bonds in April 2019 and raised about $100 billion. Mubadala Investment Company sold $4 billion in bonds in May 2020 and the list goes on. The debt of the GCC states is gradually increasing and they soon may turn from creditors to debtors.


The crisis associated with falling oil prices has affected all of the GCC states, but with different effects. It was most painful for Saudi Arabia. The consequences of the crisis were not as severe for the LNG-oriented economy of Qatar and the UAE, whose transportation, tourism and financial sectors provide a significant share of income. However, due to the COVID-19 pandemic, their economies also suffered. Even if the global economy recovers in 2021 and oil prices gradually rise, negative trends in the Gulf economies will continue. This is due to the accumulated structural problems.

If the economic downturn continues, the GCC states will face foreign workers unemployment. It is possible that some of the unemployed guest workers will prefer to migrate to Europe, which will create new problems for the EU. The deteriorating economic situation has the potential to undermine political stability in the Gulf states. This is especially true for Saudi Arabia. A tacit social contract is currently in effect in the kingdom. Large segments of Saudi society do not participate in government, but in return they receive social guarantees. When these guarantees begin to deteriorate, political destabilization of the kingdom with the growing influence of radical extremist organizations such as al-Qaeda cannot be ruled out.

To solve financial problems the GCC states need to abandon excessive spending, in particular to reduce large military expenditures. This, in turn, will require direct negotiations between the GCC states and Iran.