With oil prices at historic lows, the impact on Gulf economies will be significant. Karim Nassif, Associate Director at Standard & Poor’s, argues that financing will have to adapt to meet the demand for infrastructure – and that renewable energy stands to benefit.
Economies in the Gulf have long relied on plentiful hydrocarbon revenues to help meet their infrastructure spending needs. Yet as oil prices remain low, governments in the Gulf Corporation Council (GCC) may have to explore alternative financing methods.
Meanwhile, with the low oil price constraining revenues, government fuel subsidies may be under pressure. Given this –as well as greater impetus for clean power – renewable energy sources may enjoy greater potential in the region.
Infrastructure feeling the pinch
Faced with declining oil revenues, governments are cutting back their spending on infrastructure. For example, Saudi Arabia has slashed its 2016 transport and infrastructure budget by 63% compared to last year. Projects such as Jeddah’s King Abdulaziz Airport and Riyadh’s Metro have seen their funding fall by nearly half.
As a result, government spending will struggle to cover the $604 billion needed to upgrade Gulf infrastructure over the next four years: indeed, S&P estimates the deficit in capital spending on infrastructure to be about $270 billion.
This problem is exacerbated by the fact that slack energy revenues will also curb the flow of bank deposits and erode bank liquidity – particularly in Qatar and the UAE. As such, the cost of bank lending for infrastructure is expected to increase across the GCC.
Oil revenues could usher in financing alternatives
Gulf countries will therefor need to explore financing alternatives. In this respect, private-sector finance could increase in importance.
Certainly, the capital markets offer potential. In 2015, project debt issuance across the Gulf increased to $76 billion, compared to $45 billion the previous year. What’s more, the successful issuances by Qatar Petroleum and the Abu Dhabi National Energy Company, as just two examples, are testament to investors’ interest.
Another potential financing solution is public-private partnerships (PPPs); indeed, water and power sectors in the Gulf are already using this model. And the possibilities could grow. For example, Dubai are building on new legislation confirmed in November 2015 that stands to open up expansion of its airport, metro and solar schemes to private investment – which could pave the way for more PPPs in the region.
Sparking renewable energy potential
The case of Dubai also shows how the oil price decline could trigger greater interest in renewable energy. The city plans to meet 7% of demand with renewable power by 2020. Indeed, at the United Nation’s recent COP21 summit on climate change, Dubai committed to sourcing 75% of its electricity from solar power by 2050.
What is more, if lower oil revenues bring about reductions in national fuel subsidies, the boost for renewable energy could be considerable.
While subsidies for fossil fuel-based industries have historically put renewable energy projects – such as windfarms or solar plants – at an economic disadvantage, more cost-reflective tariffs in the energy sector could improve the renewable market in the future. In fact, lower oil revenues have already prompted governments to consider energy sector reform: Bahrain, Oman, Qatar and Saudi Arabia have all raised the price of gas supplied to downstream industries.
With important implications for the region’s infrastructure, the oil price decline is certainly something to watch in the Gulf.
Karim Nassif is based in Dubai and is a lead analyst for Standard and Poor.
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