Low oil prices set to accelerate Gulf subsidy reform

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.