The effect of sudden drop in oil prices in second half of 2014 in Middle East and North Africa (MENA) and Gulf Cooperation Council (GCC) can have a great impact on the pattern of foreign investment in Qatar and other countries. According to Husain, et al. (2015), reduction in oil prices is expected to increase the economic activity worldwide in years 2015 and 2016, provided there won’t be any significant changes in other macroeconomic variables. Users are happy with lower oil prices, but the oil corporations and the whole oil sector will lose a lot of income. Net oil importers or countries that have a smaller oil industry will make profit when the cost of production decreased, since terms-of-trade (TOT) benefits from lower import prices. However, those countries with a big oil industry, especially the oil exporters like Qatar, Saudi Arabia, UAE, Oman, etc. are facing trouble in public spending as the main source of income for these countries was oil export and foreign investment in these areas has also sharply declined (Husain, et al., 2015). Most of these countries are experiencing the term-of-trade loss.
To assess the macroeconomic impact of lower oil prices on the foreign investment in countries, a distribution of oil exporters and oil importers is a must. It is important to understand the difference between net oil importers and net oil exporters (Hussain et al., 2015) as the impact is quite different on the type. Cochrane (2015) claims that oil prices reduction is expected to decrease energy export purchases from $743 billion in 2012 to $410 billion in 2015 as reported by the Institute of International Finance. For larger GCC economies this is not an issue in the short term, they are confident to cope with it, but it does affect fiscal strategies. Except for Qatar, all economies are slowing down and this will affect the private sector (Cochrane, 2015).
me your resumeBeing one of the largest liquid natural gas explorers in the world, Qatar and its residents managed to import billions of dollars into the country in terms of foreign investment. As the International Monetary Fund states, there is a risk of Qatar facing a budget deficit in 2016 due to decreased oil prices and their importance for nations that depend on energy, such as Qatar (Parasie, 2015), thus, Qatar is trying to shift their dependence on income based on energy resources to other areas, such as direct foreign investments in capital infrastructure (Parasie, 2015).
Qatar had a goal of becoming a leader in foreign investment and business environment areas and attracted a large sum of foreign investment due to high economic growth in the country (Manhal, 2005). As, the country is politically stable, has a high-quality infrastructure, tax rate of 10% that is amongst the lowest in the world, and an investment law policy that gives foreign investors the permission for owning companies in specific sectors, such as IT, sports, distribution, and culture, still is attractive for FDI. Foreign investors are mostly attracted by oil and gas sectors, as well as construction, financial services, and public work. The main investors come from the countries including USA, Japan, Singapore, and South Korea (Monaldi, 2005).
GDP growth in GCC countries is the biggest motivation for FDI entrance in those countries (Choe, 2003). So, if GDP growth really attracts foreign direct investments, the promotional policies for encouraging the inflow of FDI are baseless and FDI inflow to low GDP countries would be redundant (Al-Iniani & Al-Shamsi, n.d.), as is expected now for Qatar and other oil importing countries. But if the efforts are instead be directed to other possibilities for growth (like capital infrastructure for football 2020 in case of Qatar), the growth would be high enough to attract foreign investment in the country.
Source: IMF managerial economic outlook (2015)
Oil prices today are 50% lower than the last year, commodity prices are also reduced, and interest rates have been low for some time, so there is no point in expecting growth in the sustained economic environment in MENA and GCC countries (Alkhateeb, 2015). Still, oil-rich countries of the Middle East are now facing rising budget deficit for the first time, and it’s creating the need for changing the economy state from rent oriented to reducing the dependence on oil profits (Alkhateeb, 2015).
Reduced oil prices have affected the fiscal and external balances of countries that are exporting oil, as it is projected that the revenue will drop by $300 billion from 2014 to 2015. The surpluses that now exist will probably recede and few of the GCC countries are now faced with a financial deficit for the first time in twenty years. With surpluses created so far, many of them will be able to dodge the large damage in their short term government spending (Alkhateeb, 2015).
Islamic State of Iraq and Syria (ISIS) has created a geopolitical nightmare that does not help attract foreign investors at all in the Gulf region. There has been a recession in FDI for a while now. Last year, only Qatar experienced any increase, which for the most part was because of them hosting the Football World Cup in 2022 and the construction work related to it (Alkhateeb, 2015). Even the UAE finished the year with negative numbers. Other countries suffered a significant loss – Saudi Arabia went from $39.5 billion in 2008 to $8 billion in 2014, Kuwait suffered a $1 billion fall from $1.5 billion, while Bahrein faced 30% loss because of the decreased faith from the investors (Alkhateeb, 2015).
Privatization, economic reforms, decreasing the governmental employment rate, and boosting the private sector are way behind scheduled in some of oil exporting countries. The UAE faces price drop in the property sector during the last several month, even in the areas such as Abu Dhabi and Dubai as these countries have failed to gain investors’ trust. Gaining interest for investment when oil prices are low is not going to be easy because of various other challenges these countries face, some of them being low credibility of institutions, the political and macroeconomic instability, and terrorism and crime that are all-present like Iran, Oman, Yaman, etc. (Monaldi, 2015).
Lowering the oil prices has affected the living standard in those countries where users had the opportunity to feel the price decline – their living costs are lower and their real income is higher after the oil price shock like India, Bangladesh, Vietnam, etc. Companies that use oil in production also prospered from lower prices. Reducing the companies’ marginal costs has reduced the production cost of goods and services. Oil importers in lower income countries are under the risk of having reduced remittances and foreign aid from oil exporters, though (IMF, 2015).
It would be logical to conclude that lower oil prices help economic growth rise, so why is it not happening actually around the globe? The majority of the 50% decrease in the prices is still not transferred to the developed countries consumers, as the gas stations reducing prices for just 10-15%. This is happening because the prices in lots of countries are formed by adding multiple taxes, and they have yet not been reduced (Alkhateeb, 2015).
The world’s economy will recover with reduced oil prices soon. Because of the simple fact that most of the countries are oil importers and that creates a negative balance for them, lower oil prices will translate into better payment balance and currency rate rising. For example, for US consumers’ lower oil prices mean higher personal income. Still, lower oil prices won’t affect all of the countries in a positive way and countries like Iran, Russia, and Venezuela may lose the battle.
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