The private sectors of the six oil-exporting countries of the Gulf Co-operation Council are, by varying degrees, experiencing their worst crisis since the oil price crash of 1998-99. However, this downturn is different to previous globally induced oil shocks.
Historically, corporate profitability was hit by cuts in public expenditure as Gulf governments recoiled from plummeting oil revenues. This time, the accumulation of sovereign wealth funds is enabling governments to raise expenditure despite falling oil receipts. But as the GCC has opened to the outside world over the past decade, the private sector’s exposure to economic contagion has grown.
In the old days, fluctuations in oil prices were the main driver of corporate profits in the GCC for two main reasons. First, government expenditure, which is the primary economic stimulant in Gulf countries given their expansive public sectors, tended to track changes in oil receipts. Second, Gulf economies were largely insulated from global capital flows given their then limited opportunities for foreign investment and the lower reliance of companies and banks on external debt financing.
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