2020 Yearender: Peace and economic squeeze in the Gulf

Ahmed Mostafa , Thursday 31 Dec 2020

This year has seen an economic squeeze in the Arab Gulf countries as a result of the Covid-19 pandemic, as well as moves to normalise relations with Israel

Peace  and economic squeeze in the Gulf
Models raise the Israeli and UAE flags during a photo shoot in Dubai (photo: AP)

For the rest of the world, 2020 was mainly the year of the coronavirus pandemic and its implications, but for the Gulf region it was about more than that.

The negative economic impacts of the pandemic, coupled with weak oil prices, pushed long-awaited reforms forward in most of the countries of the Gulf Cooperation Council (GCC). Yet, it was not only an economic squeeze, as the region also witnessed the disappearance of two veteran leaders: sultan Qaboos Bin Said of Oman and sheikh Sabah Al-Ahmad, the emir of Kuwait. It was also the “year of peace,” as dubbed by many moderates who support peace prospects in Palestine.

However, the most important feature of the year, though this was not so much in the news, was the GCC’s shift in policy between the three regional players of Iran, Israel and Turkey. Core to that shift were Saudi-Emirati relations, which shape the region on matters ranging from the Qatar crisis to the war in Yemen and beyond.

Despite the fact that the GCC countries have huge wealth accumulated through decades of oil and gas exports, the economic downturn resulting from the coronavirus pandemic has not spared the region. Its economic prospects might not be as dire as those of other countries and regions, including many of the developed economies, but it has felt the pain of a double squeeze resulting from deteriorating economic activity and weakened oil and gas prices.

Earlier in the year when the pandemic started to devastate the global economy, the International Monetary Fund (IMF) estimated that GCC sovereign wealth funds (SWFs) were losing a quarter of a trillion dollars. Towards the end of the year, the IMF adjusted that loss to almost a third of a trillion dollars. The prospect by year end could be more, amounting to almost one eighth of Gulf SWF assets. While there are no official figures available about these SWFs, the UK Economist Intelligence Unit (EIU) estimates them at about $4 trillion. 

Part of the drop in SWF assets was a result of withdrawals by GCC governments to support ailing economies adversely affected by the pandemic. But most was due to a drop in transfers to the funds from the proceeds of energy exports, since these dropped vertiginously as a result of the pandemic.

Almost all the Gulf countries have budget deficits, though not to the same extent. Oman and Bahrain have been hurt the most, followed by Kuwait and Saudi Arabia, while the UAE and Qatar have suffered the least.

According to the agency S&P Global, GCC governments and companies have increased their borrowing via bond issuances to offset their budget deficits, with some returning to issuing sovereign bonds for the first time in years. Total bond issuance for the region has already exceeded the $100 billion mark, and with oil prices in the range of $40 to $50 a barrel, the budgets of most of the GCC countries might stay in deficit up to the end of 2023.

Except for Qatar and the UAE, the budgets of these governments need oil prices of between $60 and $80 to balance – a price that is higher than the average this year and will probably also exceed next year’s average.

As ordinary people in the major Gulf cities have become more aware of the hardships faced due to the pandemic, low oil prices, and other factors, governments in the region have had a golden opportunity to push for change. Most of the changes they have introduced have been economic reforms previously put on hold for socio-political reasons. Now, it has been plausible to introduce them by capitalising on people’s trust that their governments “will be doing the right thing” to take them through these difficult times.

The impact of the economic squeeze and the tighter public purse has affected immigrant workers more than local citizens, however. Hundreds of thousands, if not millions, of expatriate workers have already left the Gulf countries or are preparing to leave them. This will have dire effects on the labour-exporting countries.

Earlier in the year, the World Bank projected that global remittances by migrant workers to low and middle-income countries would drop by 7.2 per cent to $508 billion in 2020 followed by a further decline of 7.5 per cent to $470 billion dollars in 2021. These estimates will now be revised down.

The GCC countries host almost a fifth of the global immigrant work force, mainly from Asia and some Arab countries, as well as some workers from Western countries. Tens of billions of dollars used to flow annually from the GCC countries to India, Bangladesh, the Philippines and Arab countries like Jordan, Egypt and Lebanon.

Though these countries might have witnessed a short-lived spike in remittances from immigrant workers in the Gulf this year, a steep decline looks inevitable. The spike this year was mainly due to expatriate workers in the Gulf leaving for good and transferring the money they had saved to their home countries in one lump sum.

END OF THE ELDERS

Two long-serving political leaders in the Gulf passed away in the second half of the year, but even so not much has happened on the road to change.

Some had anticipated that their succession might lead to younger leaders and a departure from the “age of the elders,” but in fact it has been almost business as usual in Oman and Kuwait. Following the death of sultan Qaboos Bin Said in Oman, the throne passed to Sultan Haitham Bin Tariq Al-Said. However, while the latter has made changes in the government, his main focus has been on internal issues, particularly the economy.

On the foreign policy front, the new sultan has appointed a new team but has also vowed to follow his predecessor’s legacy of neutrality and careful diplomacy. Even if the new sultan wanted to introduce a major shift in policy, it would not be the best of times to do so in the middle of a pandemic and an economic crisis that is the worst among the GCC countries.

Later in the year, emir of Kuwait sheikh Sabah Al-Ahmad Al-Sabah died in hospital in the US. His brother, Sheikh Nawaf Al-Ahmad Al-Sabah, succeeded him and has vowed to preserve the legacy of his predecessor. Again, the new emir is not that young, at least not when compared to the new generation of de facto rulers in Saudi Arabia and the UAE (Saudi Crown-Prince Mohamed Bin Salman and Abu Dhabi Crown-Prince Mohamed Bin Zayed). He is focusing more on internal issues, particularly the economy.

However, with the help of a push from the outgoing US administration of President Donald Trump, the new Kuwaiti emir is hopeful of ending the Qatar crisis by the end of the year. The late emir led regional efforts towards reconciliation from the summer of 2017, when Saudi Arabia, the UAE, Bahrain and Egypt started to boycott Qatar owing to its alleged support of terrorist groups seeking the destabilisation of the region.

The succession in Oman and Kuwait has not marked a paradigm shift in policy. The elders’ legacy is still in place, and an end to the order they established might not be soon. Yet, the new order spearheaded elsewhere in the Gulf by Bin Salman and Bin Zayed is continuing, even if it has witnessed a bit of a lull.

Meanwhile, some Western analysts are echoing the Muslim Brotherhood narrative that the year marked a “cold relationship” between the two main blocs in the GCC around Saudi Arabia and the UAE. However, in fact the strategic relationship between the two neighbouring countries is bolstered by the shared vision of the “two Mohameds” towards almost all regional and global issues.

When the UAE announced the normalisation of its relations with Israel in mid-August this year, followed by Bahrain, the expectations were that other Gulf states would follow suit. All eyes were on Saudi Arabia, but Riyadh announced it would not normalise its relations with Israel until a settlement with the Palestinians was reached.

The UAE was not shy of having implicit relations with Israel before normalisation took place, so it was able to adopt a full-blown policy of explicit normalisation when it felt the time was ripe. Saudi Arabia has not objected to the Emirati and Bahraini decision to normalise, and even Oman has welcomed the moves.

Probably had the current Saudi crown-prince been in power in Saudi Arabia, the country would have done the same thing. But the Israelis are convinced that there can be no full normalisation with Saudi Arabia as long as King Salman is on the throne.

Emirati and Bahraini relations with Israel are developing rapidly, in what could be described as a “hot peace” when compared to the “cold peace” Israel has had for years with Jordan and Egypt. The Gulf countries have never been at war with Israel, and although people in the Gulf sympathise with the Palestinian cause, the nature of the social contract between the people and their rulers will not allow any divergence on the issue of peace with Israel.

The Emirati leadership sees a strategic importance in allying with Israel and not with Iran or Turkey. The same vision is shared by the Saudi crown-prince. Despite the fact that the timing of the Emirati and Bahraini announcements might have looked like a political boost for outgoing US President Donald Trump and politically-troubled Israeli Prime Minister Benjamin Netanyahu, Abu Dhabi and Manama saw the perfect window in a year that has been marked by many shifts of policy for their announcements as expressions of sovereign policy.

The rapid development of relations between Israel and both Gulf countries is an indication of a previous, more-subtle build-up that came to a head with the normalisation decision. It has been a steady policy of the UAE to shape change in the region in this way since it started to follow a more proactive foreign policy less than a decade ago.

ASSASSINATIONS AND ATTACKS

The US policy of maximum pressure on Iran was probably the most significant regional development for the Gulf countries.

While Qatar, an ally of Iran and Turkey, could do nothing to dilute it, the Saudis were appeased, even if this US policy was also not without other impacts on the Gulf. Oman and Kuwait had to scale down their trade links with Iran in order not to violate the American sanctions. Even some businesses in the UAE came under American scrutiny for allowing Iranian transactions.

But Saudi Arabia received the lion’s share of the impacts of the US policy in the shape of the increasing attacks by the Iran-backed Houthi militia in Yemen. Saudi Arabia is leading a coalition to reinstate the legitimate government in its southern neighbour and curb the Houthi control of most of the country, and any American pressure on Iran results in more Houthi-fired missiles and Iran-made drone attacks on Saudi targets.

The year started with US drones assassinating the Iranian general Qassem Al-Suleimani in Iraq. After fears of Iranian reprisals that might affect the Gulf, Tehran then fired missiles at an Iraqi military base used by US forces with no serious causalities. However, since then the Houthis have intensified firing missiles and armed drones into Saudi Arabia.

Towards the end of the year, leading Iranian nuclear scientist Mohsen Fakhrizadeh was assassinated near Tehran by Israeli intelligence agents, according to the Iranian authorities. Iran has yet to respond, and there is cautious state of alert in the Gulf.

These assassinations and intensified attacks by Iranian proxy militias have been complicating the prospects of a political settlement in Yemen. Saudi Arabia is keen to end the war it has been involved in since 2015, and its main ally, the UAE, withdrew most of its troops from Yemen in June last year.

The Saudi-backed government of Yemeni President Abd Rabbu Mansour Hadi is weak and has been making concessions to the Muslim Brotherhood-affiliated Islah Party to garner support internally. The southern factions in Yemen are not happy with the Brotherhood influence in the Hadi government, making them reluctant to go ahead with a Saudi-brokered agreement last year to bolster the “legitimacy” forces against the Houthi militia.

It seems that these issues will now have to wait until the inauguration of new US President-elect Joe Biden in January. The expected new American approach towards Iran might encompass all these issues, including Yemen. Biden might not revert to former US president Barack Obama’s policies towards the Middle East and the Gulf, but most likely he will reverse many of Trump’s policies in the region.

Biden’s presidency might push for an end to the war in Yemen, pressuring Riyadh more than Trump did in the last year of his presidency. But Washington might also not go as far as to intimidate its Gulf allies to appease Tehran.

The main concern, feared by many, is that the anticipation of a shift in US policy towards the Gulf could lead to compromises that give the Muslim Brotherhood and its backers like Turkey and Qatar a renewed role in the region. The UAE stands firmly against any such drift, but Saudi Arabia might have to make certain compromises as long as Mohamed Bin Salman is still only number two in his country.

*A version of this article appears in print in the 24 December, 2020 edition of Al-Ahram Weekly

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