Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

The Economic Earthquake that Reshaped the Middle East

| June 05, 2018

Earthquakes often alter and sometimes even destroy the landscape. The economic earthquake that was brought upon the Gulf Cooperation Council comprising Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, and Oman in June 2017 has indeed reshaped the landscape in the Gulf forever.

This economic shock has only accelerated GCC competition, spawning a race for economic diversification, foreign investment, and new trade relationships. Every state is emerging from the crisis economically more proactive and with new ambitions.  

Given this new normal, the United States should redouble diplomatic efforts to mend ties between Qatar and the blocking states, without favoring the interests of one state over another. The United States has an opportunity to play a role in shaping GCC private sectors and promoting further investment in the United States. But it needs to be seen as an honest broker, without allegiance to one side or the other in the rift, despite what may have been said earlier in the dispute. The United States should push for a Camp David Summit with the GCC to counter Iran’s activist foreign policy in the region, or the risk is that the longer term victory may be Tehran’s.

As the first United States Treasury Attaché to Qatar and Kuwait, I was right in the middle of the earthquake in Doha that hot day in June. The economic tectonic plates of the Gulf shifted, creating a new normal that will not revert back to pre-blockade status quo. The crisis has truly shattered the fragile trust inside the GCC.

As a direct result, GCC members are implementing changes to their banking, trading, and sovereign relationships. These states are focusing on greater investment in the US and Asia rather than within the GCC, modeling their approach after Singapore’s Temasek Private Holdings Limited. Local banks are opening more branches outside the GCC, continuing to tap international debt dollar markets, and establishing new trade routes. Even the recent debt dollar market sale by Saudi Arabia ($11 billion) and Qatar ($12 billion) in late April was a race.

The blockade has also propelled the GCC countries and primarily, Saudi Arabia and Qatar, to make some internal domestic economic changes. For instance, Qatar has announced a number of critical labor reforms, including granting permanent residency to children of Qatari mothers and foreign fathers and pledging to end the sponsorship system of labor employment. In Saudi Arabia, the government has started the process to end the ban on female drivers and accelerated the pace of Vision 2030 reforms, including the establishment of a new economic zone.

In reviewing Qatar, the March International Monetary Fund (IMF) report indicates that the impact of the GCC crisis is declining and the country faces bigger threats from greater funding costs amid tightening global credit and a higher budget/current account deficit if fiscal consolidation is delayed.

As a result of the blockade, Qatar has been able to diversify its trade routes, opening its $7.4 billion Port Hamad, which in its first year captured twenty-seven percent of Middle Eastern trade flows, and increased trade through Oman. The combination of a $200 billion infrastructure program ahead of the 2022 World Cup and ongoing/future structural reforms, Qatar hopes will continue to diversify the economy away from its reliance on energy. Qatar has built on the success of its June 2016 bond sale that raised $9 billion with an additional $12 billion debt sale in April projecting a narrative of healthy demand from investors.

Another result is that Qatar is strengthening its historically close commercial ties with Turkey, with the Qataris promising an additional $19 billion of investment into Turkey in 2018, on top of the $20 billion figure cited by Qatar’s Chamber of Commerce Vice Chairman Muhammed Bin Ahmed Bin Towar Al Kuwari. Of that investment, $650 million will target agriculture and livestock, seeking to improve Qatar’s food security.

In spite of last year’s blockade, Qatar’s economic landscape remains dynamic. I witnessed firsthand how Qatar stood unified in the early days and months following the blockade. Qatar, the same country that transformed itself from a pearl diving economy into a natural gas-fueled economic metropolis, boasting the world’s highest per capita income and immense growth, is now taking steps to transform itself into a more proactive and diverse economy. Qatar is attempting to move away from its reliance on natural gas and diversifying its trade routes away from its traditional GCC partners while facing economic challenges such as tightened liquidity.

In the immediate aftermath of the blockade and the months that followed, Qatari local banks experienced tightened liquidity, rating agencies adjusted their view, and long standing trading alliances disintegrated overnight. In April, the Qatar Central Bank approved the merger of Masraf al Rayan, Barwa Bank, and International Bank of Qatar, largely motivated by reduced deposit growth stemming from lower oil prices and government spending. If this is finalized, it will be a wise move given the over-banked economy but also a sign of potential distress in the banking sector.

Over the last year, Moody’s has predicted the crisis as a negative force on all GCC credit ratings. While individual country outlooks continue to be murky, the uncertainty has forced all GCC countries to be more creative and outwardly focused. The International Monetary Fund in March said that Qatar will have projected GDP growth of 2.6% this year and the “direct economic and financial impact of the diplomatic rift is fading.” Qatar has built on the success of its June 2016 bond sale that raised $9bn with an additional $12bn debt sale earlier this month.

Qatar Investment Authority, its sovereign wealth fund has been pivoting towards the US and Asia and away from Europe. Qatar Emir Sheikh Tamim bin Hamad Al Thani has been pivoting greater investments into the US to secure trade deals. According to the Qatar Emir, the economic partnership between Qatar and the US is worth "more than $125 billion" and the plan is "to double this number in the near future", positioning Qatar as one of the fastest growing economies in the Middle resisting the influence of the blockade.

Qatar has pivoted its trade routes to riskier partners in Turkey, Pakistan – and Iran. Iranian non-oil exports to Qatar since June 2017 were up at least 127% on the year, according to Iran’s Trade Promotion Organization. These trading relationships will only grow stronger in the years to come. However, Qatar and its Central Bank will need to be remain constantly vigilant against the influence of Iranian illicit finance sneaking into Qatari formal and informal financial institutions.

As it enjoys expanded influence, there is a risk that Iran stands as the sole victor of the standoff. Iran is filling the political vacuum in the region and taking advantage of this fragile moment of the GCC schism. Iran stands as the sole beneficiary of the GCC crisis, reaping economic, strategic, and geographic benefits. The blockade has created new markets for Iranian businesses to supplant competitors based in the Gulf States.

As the new normal becomes reality, prospects for greater security and political stability in the region depend squarely on the success of current economic reforms. The United States must seize this opportunity to help shape this process and bring all parties together as a bulwark against Iran. That is in the long-term interests of every one of the GCC countries, whatever their short-term reservations.

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“The Economic Earthquake that Reshaped the Middle East.” Belfer Center for Science and International Affairs, Harvard Kennedy School, June 5, 2018.