Mali Chivakul (J. Safra Sarasin Sustainable AM) || The war in the Middle East has already had a visible impact on Gulf countries. Oil and gas production has fallen sharply, and other economic activities have been disrupted. Even if an agreement is reached soon, the recovery of supply and weakened demand will likely take time. We expect most countries to enter recession. Oman is the main exception, as its political neutrality has kept its energy infrastructure intact and it does not rely entirely on maritime transit through the Strait of Hormuz.
On the external front, the Gulf Cooperation Council (GCC), including Bahrain —the most vulnerable—, continues to show resilience, as they have been able to access liquidity in US dollars. GCC sovereign spreads have already priced in an agreement between the US and Iran and this external strength.
The war in the Middle East has already had a visible impact on Gulf countries. The closure of the Strait of Hormuz has caused a sharp decline in exports and crude production, while damage to energy infrastructure has also reduced oil and gas production. In March, oil production in Kuwait was more than 50% lower than the level in February (Chart 1). The decline in the United Arab Emirates was around 40%, while Saudi Arabia fared better, with a decrease of 23%, thanks to its ability to use its East-West pipeline and its ample storage capacity. According to various sources, the reduction in Bahrain and Qatar was similar to that of Kuwait. Oman, for its part, has been the least affected country.
Beyond the closure of the strait, damage to gas production infrastructure in Qatar also implies a significant reduction in gas production, which will take five years to normalise, according to Qatari authorities. Qatar's PMI fell notably in March, compared to the United Arab Emirates and Saudi Arabia (Chart 2). Both Qatar and Kuwait have the highest proportion of the oil and gas sector within their GDP. It is not surprising that, according to the IMF (Chart 3), these two countries are expected to suffer the deepest recessions this year.
We believe that the IMF's projections are relatively optimistic, as the supply disruption has not only affected the oil and gas sector. Other import-dependent sectors have also been disrupted, as cargo and container ships have barely been able to navigate the strait. Service sectors such as tourism and airlines are also unlikely to recover quickly, leading us to be more pessimistic than the IMF regarding GDP growth forecasts for Saudi Arabia and the United Arab Emirates.
Oman has emerged as the most resilient country due to its neutrality within the region. Its energy infrastructure has not suffered damage from Iran. Geographically, it also has an advantage over Bahrain, Kuwait, Qatar, and the United Arab Emirates, as Oman has ports on the Arabian Sea. Oil production and exports continue to flow from Oman.
GCC countries continue to show resilience on the external front. Both exports and imports have fallen sharply, but all countries maintain stable reserves, as they have been able to borrow in the private market. According to the Financial Times report last week, Abu Dhabi, Qatar, and Kuwait have collectively raised around 10 billion dollars through private placements of USD bonds.
As we pointed out at the beginning of the war, Bahrain's external and fiscal position appears to be the weakest, but other GCC countries are likely to act as a lender of last resort for Bahrain. In fact, Bahrain turned to the United Arab Emirates, securing a 5.4 billion dollar swap with the UAE in early April.
Since the ceasefire began, credit spreads have narrowed from the highs reached in March during the escalation of the conflict. Oman's apparent resilience has been recognised by the market, as its sovereign spreads have tightened from 126 bps at the peak of the war to 88 bps, a much lower level than in February and similar to that of Saudi Arabia, despite its much lower credit rating (BBB- vs A+). Saudi Arabia's spreads have returned to pre-war levels.
Bahrain's spreads have also fallen, from 340 bps to 232, close to the average recorded in February. The swap agreement with the United Arab Emirates has given investors confidence that the GCC will continue to support its weakest member in the short term.
