Persian Gulf Nations Grapple with Deflation

The Persian Gulf region has long been known for the wealth that has flowed from its oil.

But images of opulence are one thing. A huge amount of debt is another.

The January 2018 Elliott Wave Financial Forecast elaborated:

Saudi Arabia's problem is all the debt it has assumed to fend off the decline in oil prices to date.

According to Bloomberg, the Kingdom still needs an 80% surge in oil income to balance its books. Kuwait, The United Arab Emirates, Oman and Qatar are in the same boat. To make up for falling oil prices, these five Mideast countries borrowed $71.4 billion from 2014 to 2017, more than twice the amount borrowed in the previous three years. Much of the proceeds went into more oil production and Saudi Arabia, Kuwait and the U.A.E. plan to spend more than $600 billion on energy projects over the next 10 years. That amount will be on top of the $1.7 trillion that went into energy investment in 2016. The more they borrow to produce, the bigger the glut becomes, and the more damaging the eventual oil slump will be.

Relatedly, a June 17, 2019 Bloomberg article discussed the Persian Gulf's "deflationary momentum." Here's an excerpt:

Sidelined for now in the global economy, deflation is having a second act in the Gulf.

Saudi Arabia, the only country in the world where the International Monetary Fund expected consumer prices to shrink this year, is almost certain to have company from its neighbors. Qatar has seen annual price declines for nine straight months, and the United Arab Emirates is likely to be in deflation throughout this year.

The deflationary momentum began in Saudi Arabia and the U.A.E. because the introduction of value-added tax in 2018 created a high base for comparison. But what's kept it going is a prolonged slump in housing costs that's now putting broader price growth into negative territory.

The price swoon is a reflection of weaker demand that's hobbled Gulf economies. Constrained by their currency pegs, authorities have instead relied on fiscal stimulus to nudge growth, with Saudi Arabia earmarking billions to support the private sector.

From a property oversupply in Dubai to an exodus of foreigners from Saudi Arabia, the backdrop is showing little improvement across the Gulf. Rental prices remain under pressure despite the implementation of measures such as an easing of fees that businesses pay on expat workers in Saudi Arabia and the granting of long-term U.A.E. visas...

Besides the housing doldrums, however, other factors are increasingly in play. Discounting by companies, a weak jobs market and meager wage gains are all depressing prices. Despite a pickup last year, economic growth has yet to rebound to levels seen before the oil crash in 2014.

Read the free report, What You Need to Know Now About Protecting Yourself from Deflation.