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Low oil prices set to accelerate Gulf subsidy reform

Monday, February 9, 2015

Significance

The sharp drop in oil prices to around 50 dollars, half their average level last year, has forced a serious fiscal rethink among the six Gulf Cooperation Council (GCC) states, who are heavily dependent on oil and gas exports. Following a decade of high oil prices, and a widespread assumption that prices would remain above 100 dollars, government expenditure has become bloated, with generous salaries and subsidies, and ambitious capital projects.

Impacts

  • Companies competing for government tenders are likely to face greater scrutiny over costs.
  • Consumer-facing companies will be less seriously affected, given the likely limited impact on personal incomes in the near term.
  • Bahrain and Oman could suffer credit rating downgrades.
  • Stability in other GCC states is unlikely to be affected due to the protection of citizen benefits.
  • Saudi Arabia will provide Bahrain with financial support if the fiscal squeeze weakens stability there.
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