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28 March 2024

Arab Spring cost GCC $150bn

Published
By Vicky Kapur

Policymakers in the Gulf Cooperation Council (GCC) have sharply increased spending in the wake of recent political unrest, according to Bank of America Merrill Lynch (BofAML), which estimates such additional spending at a whopping $150 billion.

“The initial response of GCC policymakers has been to sharply increase current spending to accommodate social pressures and to pledge intra-regional fiscal transfers to less endowed members,” said Jean-Michel Saliba of BofAML in an economic note.

“We estimate that these extra GCC spending pledges total $150bn (12.8 per cent of GDP) while 2011 appropriations could reach 4.9 per cent of GDP, supporting growth,” the note said. Nevertheless, analysts at the bank fear that this alone would not suffice in the long run, and deeper economic reforms will be needed to accelerate job creation.

“This has averted potential disquiet over governance in most countries, though, over a longer-term horizon, economic reforms will be needed to buoy private sector growth and job creation,” wrote Saliba in the note.

The UAE economy, the note said, had made the most advances in its diversification drive, with contribution of hydrocarbons to total GDP declining from 50 per cent in 2000 to just above 30 per cent in 2010. “The Arab unrest will likely encourage GCC policymakers to deliver on their diversification plans though we are still wary of legacy projects and the potential for overcapacity in specific sectors,” the note said.

However, there are issues of sustainability in certain countries. While the UAE, Qatar and Kuwait are in good shape to absorb the new spending bills as the current international oil price is still above these countries’ breakeven oil price, Bahrain has seen a breakeven price hit $110 per barrel even as its “hydrocarbon resources may be exhausted in the coming decade,” notes BofAML.

“While the Great Arab Revolt has shown the limits of the current MENA social contract, GCC monarchies have proved more resilient, with the exception of Bahrain, and will likely remain so for now,” the note maintains. “Economic diversification efforts facilitated by the oil boom will continue, though overall regional growth will remain tied to oil price vagaries.”

The report cites “a more streamlined investment pipeline, a recovering real estate sector and a likely less supportive global environment” for a healthy regional growth of 4.2 per cent in the coming decade – though still below pre-2008 levels. “The current pace of increase in discretionary spending in response to social tensions may have to be reined in to avoid turning it into a binding constraint on growth,” the report cautions.