Returned from the Gulf: COVID Crisis 2020

By Philip Mudartha
Bellevision Media Network

Mumbai, 31 Aug 2020: The following chart depicts the monthly average price of Brent grade Crude Oil for the previous five years. The price crashed to zero, beginning in March in the aftermath of global lockdowns announced to control the spread of the Novel Corona Pandemic. The unplanned lockdowns disrupted economic life in every nation especially manufacturing. The demand for petroleum products hit rock bottom.

 

The previous dip was in January 2016. Then, the price had dipped to below $30/bbl.  But, this is the sharpest drop ever in the history of oil production and exports over the twenty-five years. The uncertainty over economic outlook has caused enormous job losses for the expatriates in the Gulf nations as oil revenues plummeted. A large number of them have lost their jobs overnight. Unable to return home due to suspension of international flights, they languish in labour camps hurriedly set-up by respective governments. Living conditions and fear of contracting the virus, many, if not all, have shelled out higher ticket prices for repatriation flights under Vande Bharat Mission Scheme by Air India.

 

 

I reproduce here below what I wrote in 2016 during pricing crisis due to demand-supply situation following the US-Iran rapprochement:

 

Is the Gulf Job Boom Over? Life for expats in GCC region

 

Crude Oil prices hit their lowest since 2003 on Monday, 18th January 2016 as the market braced for additional Iranian exports. Last Friday, the US and the EU had announced lifting of sanctions against the country imposed to bring about winding down its nuclear weapon capability ambitions. Brent crude was down to $27.67 a barrel.

 

 

The Economies of Arabian Gulf Countries will be the hardest hit

 

As net exporters, countries of the Gulf Co-operation Council (GCC) had basked in the glory of astounding petro-dollar surpluses for over a decade. Their sovereign funds have been on a buying spree of assets, both financial and real estate globally, but most importantly in the US and the EU.

 

At home, their citizens enjoyed massive subsidies on consumer goods and specified services. Citizens owned comfortable state constructed housing at interest free long term loans which could be waived when repayment would be due. All utilities like electricity for residential use and municipal water supplies were free. Freebies in education, healthcare and several other lifestyle services were on the offer.

 

Qatar, the richest country in the world on the basis of per capita income and a member of GCC, has accumulated surpluses of more than USD 315 billion despite extravagant spending on infrastructure projects and social welfare schemes.  For a decade, it was the preferred destination for immigrant expatriate workforce. CIA Fact book estimates the net immigration rate at 2.24%. As a result, the population crossed 2.2 million by July 2015.

 

Qatar boasts of diversification of its economy into non-hydrocarbon sectors. However, oil &gas sector contributes 92% to the GDP.

 

What is true of Qatar applies to other GCC countries, exception being the Dubai Emirate, where the hydrocarbon contribution is an insignificant 3% to its GDP. But, we must keep in my mind that the petro-dollar surpluses of its neighbours drive the non-hydrocarbon economy of Dubai and to some extent that of Bahrain.

 

As 2016 began, unsettling geopolitical developments dominate the news

 

The crude oil price slide is not the only unsettling development for the regional uncertainty. These are arising from the complex conflicts in Iraq, Syria, Yemen, and Libya; and, to some extent the spill-over effects of governmental crisis in Lebanon, Palestine, Egypt, Tunisia and Arab Africa. There are internal security threats owing to brewing discontent among sections of populations supporting underground opposition groups within GCC, especially in the Shia-dominated provinces of Saudi Arabia, districts of Kuwait and Kingdom of Bahrain. The rising tensions between Saudi Arabia and Iran add a confidence-sapping climax to the unsettling geo-political scenario. It appears that the GCC countries are hit by a double whammy: oil price crash and geo-political instability.

 

The regional governments have no option but to reform

 

"Qatar is well-positioned to withstand lower oil prices thanks to its strong macroeconomic fundamentals” boasts Qatar National Bank (QNB) in its Insight into Economy document released on 1st September 2015. It banks upon the global benchmark crude oil price to average USD 55.4/b in 2015, USD 55.5/b in 2016 and USD 60.2/b in 2017.

 

Prices fell sharper than predicted in the second half of 2015, ending the year 2015 with an average USD 52.0/b. The USD 3.4 deficit from the budgeted price is insignificant in absolute terms; however, alarm bells were ringing in business and corporate circles as the year folded. Job cuts were announced by both public sector owned oil & gas and allied industrial corporations as well as private sector trading & contracting companies.

 

“Our company is always working to improve business performance and maintain our competitive position in the market. Given the current environment in the industry, it is particularly important for us to manage and optimize our operating costs through internal structural changes, process improvements and project selection reviews, reflecting best practices in the industry,” is how the employers will issue press releases whenever rumors of massive job cuts floating among expatriate workforce will induce local business reporters to write a new story.

 

Internal structural changes are euphemism for firing expatriate managers and long serving professionals and replacing them with a national manager and hiring new assistants at lower wages. Retained talent, especially the subservient types, will take either a lower job profile or assume proxy responsibility for the national manager in addition to his own functions and probably even dispense with the office secretary or execute three-in-one functions. We could soon have our retained expatriate professional working long hours beyond the mandated eight-hour day forty-hour week.

 

Qatar Petroleum (QP), the powerhouse of Qatari economy has fired over 3,000 employees already during its eight-month long corporate restructuring program that began at the end of last year. Several long-standing and experienced staffers had their contracts terminated, including those over the official QP retirement age of 60.

 

Is the Gulf Job Boom Over?

 

The QNB document states the Qatari fiscal break-even price of crude oil at USD 61.1/b and USD 58.4/b for 2016 and 2017 respectively. At Fiscal break-even price, the government revenues and its expenditure are balanced, leaving no surplus or deficit.

 

The current crude oil price is more than $30/b below Qatari fiscal break-even price for 2016. Even if prices were to recover and average at $40/b during 2016, which is what US Government Energy Department believes, there will be a $20/b hole in the pocket.

 

Arabs are known for their business acumen, which means they are not tolerant of business losses even on short term basis. I mean, while it is impossible to scale down the core operations of oil & gas and allied manufacturing facilities, a massive reduction in operations personnel is not practical. What is feasible is offering new contracts at reduced wage packages and modified employment terms.

 

The coastal districts of Karnataka, including Udupi, have a large expatriate population living in the GCC countries. It is important to understand the scenarios of employment, living costs and standards of living in the region and the geo-politics in greater detail before deciding to make a career in the Gulf. The heydays of the liberal pay and perk packages in the Gulf countries are over.  It is advised to seek a professional career in India which will pay-off over the long-term.

 

The socio-economic-political scenario poses higher risk

 

The bickering and squabbling between Arabs came into the open on 5th June 2017. Led by Kingdom of Saudi Arabia, neighbors UAE, Bahrain and Egypt (foe of Muslim Brotherhood, therefore friend of KSA) severed diplomatic relations and announced an economic blockade.  This blockade turned Qatar, a peninsula with its only land border is with KSA, into an island. The fraternal diplomatic crisis diverted funds from development projects into military projects. The Israel, USA, EU and Russia tried their best to sell military equipment to both sides of the conflict inducting into the region, sophisticated Rafale Fighter Aircrafts from France, S-400 surface to air missiles and other cyber war technologies for hacking civil and defense establishments of warring parties. Turkey embedded its forces with a base in Qatar. The KSA and its allies pounded Yemeni Houti rebel strongholds, which Qatar had allegedly funded. Overall, the peace, tranquility and security of the region were threatened by internecine intra-Arab conflicts than their traditional foe, Israel. To us, Indians, the peaceful expatriates going about their jobs were put to additional costs of living, thus straining the savings potential.

 

COVID-19 Pandemic and its impact on Gulf Economies

 

Battered by a triple whammy of the COVID-19 pandemic, a glut-driven oil-price plunge, and steep meltdown, Gulf countries are in a state of partial lockdown, with most economic activities at a standstill. For millions of expatriates, this sharp downturn portends a massive repatriation wave, ending a remarkable era of free-wheeling entrepreneurship, prosperity and livelihood. The COVID-19 pandemic is expected to be a key catalyst in a critical shift in the demographic landscape of the GCC.

 

NRIs constitute up to 35 percent of the GCC’s foreign population. It is currently home to nearly 9.3 million Indians, who collectively account for approx 62% of the annual US$80 billion foreign remittances to India. Expats in the Gulf remitted about US$49 billion in 2019, two percent of India’s GDP.

 

The UAE, with more than 3.3 million Indian expatriates, has traditionally been the largest source of remittances to India. According to the RBI of the total remittance in 2018, the UAE’s share was 26.9%, KSA’s 11.6%, (NRI population: 1.56 million), Qatar’s 6.5% (NRI population: 0.692 million) and Kuwait’s 5.5% (NRI population: 0.825 million).

 

An estimated 0.7 to 1 million NRIs will return, having lost their jobs to the economic downturn due to the pandemic and oil price crash. At the time of writing on 30th August 2020, Brent has settled at $45.81/bbl. The GCC economies will contract. The government’s budget deficits will swell, eating into their sovereign wealth accumulated during the high oil prices of previous decades.

 

Like the rest of the world, all GCC countries had announced lockdowns in mid-March 2020 in an effort to control spread of the virus. However, by then, community transmission has already begun. As of 30th August 2020, the number of cases in the kingdom is 313,911. The UAE Covid-19 cases are 68901. (Bahrain 51391, Kuwait 84636, Oman 84652, Qatar 119,000 and KSA 315,000). The curve has begun flattening and Unlock phases have been announced but the deflationary effects on the economy are there to stay as consumer confidence and market size have dwindled.

 

In the wake of the slowdown sparked by the oil-price plunge over the past few years, some governments have enacted taxes and fees to turn foreigners into new sources of revenue, e.g. introduction of road tolls; visa renewal fees; and excise taxes on alcohol, tobacco and sugary drinks. The UAE and KSA have introduced a 5% VAT, and scrapped fuel subsidies.

 

The GCC is India’s largest trading partner, with total bilateral trade at US$121.33 billion in 2018-19, amounting to 14.4% of India’s total trade. In 2018-19, total exports to the region amounted to US$41.62 billion, while total imports from the region were pegged at US$79.71 billion. India mainly exports finished precious stones and jewellery items, mineral fuels and refined oil, and electronic items to the GCC countries. India mainly imports crude oil and refined petroleum products. The pandemic will cause a sharp decline in the trade figures. NRI businesses, mainly SMEs like import-export of commodities, hotels and restaurants, are likely to be impacted. The only sector seeing an uptick is healthcare, where the doctors and paramedical staff are working overtime as frontline workers against the pandemic.

 

What awaits the repatriated NRIs back home?

 

- to be continued..