A Very Special Recession

By John Greenwald

Falling revenues force Persian Gulf states to curb their spending

For most of the past decade, the money flowed like oil from the local gushers. All told, nearly $1 trillion poured into the sparsely populated, energy-rich Arab states along the Persian Gulf.* Now that stream has dwindled sharply. This year the region will take in only about $60 billion in oil revenues, down one-third from 1982 and only about one-half the level of two years ago.

Along with the fall in oil prices, the region's economy has been hit hard by the three-year-old war of attrition between Iran and Iraq. That conflict could expand and seriously curtail oil shipments. Moreover, the two combatants sharply reduced their imports of Western goods.

Last year's spectacular crash of the Souk al-Manakh, Kuwait's unofficial stock market, has also had a depressing effect. More than $90 billion in debts was outstanding when the wildly speculative market collapsed. While the Kuwaiti government has moved to bail out small investors, losses are still widely felt. "The debacle has cast a terrible shadow over business in the gulf," notes one foreign observer.

All these troubles have plunged the gulf states into a unique recession. On the one hand, budgeted government spending, which fuels the economies of the area, has followed the path of energy earnings and taken a tumble. In Saudi Arabia (pop. 9.7 million), the largest and most energy rich of the Arab gulf nations, officials have allocated $75.4 billion for the current fiscal year, down 17% from the previous period. But the region's wealth remains so great that such cutbacks have not yet caused much hardship. "The gold rush is over," says one U.S. diplomat stationed in the area. "But that doesn't mean that there's no gold out here. It just means that you can't pick up the nuggets on the street any more."

Indeed, a slump by gulf standards might look like prosperity to much of the rest of the world. Signs of the downturn's unusual nature are apparent everywhere. "Recession!" shouts the ad in the Khaleej Times, a daily newspaper in the United Arab Emirates port city of Dubai. "Gold watches at half the actual price!" That is unlikely to mean a steal, however, since the Girard Perregaux timepieces normally cost up to $6,000.

Nevertheless, the decline is having an impact. In Qatar (pop. 260,000), government ministries have been asked to trim their payrolls by an average of 20%. In the United Arab Emirates (pop. 790,000), officials are considering a reduction of as much as 22% in state employment. That would mean a loss of some 10,000 positions.

Such public belt tightening has led to a new eagerness on the part of applicants for work in the private sector. "I had six or seven young men in here recently who were willing to take the jobs and salaries we were offering," said one Western banker in Bahrain (pop. 330,000). "These were people fresh out of school who in the past would have been asking for and probably getting the sky."

Retailers too are noticing a change. "There is a slowdown in business, no doubt," says Ibrahim Al Touq, general manager of E.A. Juffali & Bros., a Saudi appliance dealer. "The main source of liquidity in our country is the government, and when it starts squeezing spending, the effect is immediately felt in the marketplace." The Saudis, for example, are buying fewer imported cars. "Frankly, I am delighted by that," says Saleh Toaimi, secretary-general of the chamber of commerce and industry in the Saudi capital of Riyadh. "Saudi families had too many cars, and I hope that the trend will continue to decline."

While the gulf slump has caused few formal bankruptcies, some firms have simply been closing their doors. Explains one foreign moneyman in Saudi Arabia: "Companies here tend to fade away. We are seeing some of that. Small concerns that operated with two desks, a phone and an Indian secretary are finding it hard to stay in business."

Ambitious development projects have also been affected. Although work continues on mammoth undertakings like Jubail, the $18 billion Saudi Arabian industrial city, other complexes still in the talking stage are being scaled back or dropped. The Saudis quietly slapped a freeze on most new construction, causing the country's index of new contracts to slide 56% between December 1982 and last July. Notes a foreign banker: "They could have tried riding the crisis out by slowly adjusting without a sharp drop in spending. But they bit the bullet in a disciplined way that you have to admire."

The falling oil income has led some normally prompt-paying gulf nations to start acting like cash-strapped debtors. Earlier this year, the Saudis resorted to slowing down payment of bills, sometimes holding up checks for months. In Qatar, officials have been asking contractors to accept oil rather than cash in exchange for their services.

Despite the cutbacks, work already under way in the gulf could persuade a visitor that a boom rather than a bust was in progress. Riyadh remains noisy with the pounding of jackhammers and the rumble of trucks and earthmoving equipment. "Most of the projects that were planned and contracted," says Saudi Assistant Deputy Planning Minister Hussein Sajeeni, "have not been affected by the cuts in revenue." Concurs a gulf banker: "The full impact of the reductions will not be seen for some years. The pipeline is very full and very busy."

The heavy use of workers from abroad also cushions the region against the slump. At least half the Saudi labor force consists of foreigners. In some gulf nations, such "guest workers" can outnumber the local ones. "We are lucky in some ways," says one oil-state minister. "When times get tough, we export our unemployment." In Dubai, three times as many Pakistanis have registered to return home this year as in 1982.

Even those gulf citizens who have lost their jobs can enjoy a level of well-being that their U.S. counterparts would envy. Medical bills throughout the region are typically paid by the government. Education is free as well. Those short of cash have little fear of losing their homes, since the public institutions that hold mortgages will wait for payment and do not charge interest.

The recession, moreover, has done little to halt the flow of many foreign goods into the gulf. Saudi Arabia imported $10.46 billion worth of such products as industrial machinery and farm goods during the second quarter of 1983, a 5% increase over the first quarter. In the United Arab Emirates, imports were 2% higher in the first half of this year than in the same period a year ago. Result: after years of accumulating huge surpluses, some energy-producing states are now sinking into the red. Saudi Arabia is expected to spend some $26 billion more than it takes in from abroad this year; in 1982 the Saudis had a surplus of some $2 billion.

To bridge trade gaps, the Saudis and their neighbors have been drawing down their Western bank accounts. Federal Reserve Board statistics show that Middle East oil exporters have about $11.7 billion in U.S. deposits, down some 25% from last December.

Several experts argue that the frantic pace of gulf development would have slowed even without the current recession. "We were saturated with buildings and offices," says Riyadh's Toaimi. Adds a banker whose firm has helped finance Saudi projects: "Construction will never see a boom like the one we had here in the ten years since 1973." That, in the view of many Arabs, is probably for the best. "We did not have time to think about what we were doing," concedes Yousef Shirawi, Bahrain's Minister of Development and Industry: "Perhaps this pause will be very good for us."

--By John Greenwald.

Reported by Barry Hillenbrand/Bahrain

* The six members of the Gulf Co-operation Council: Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates and Oman.

With reporting by Barry Hillenbrand/Bahrain This file is automatically generated by a robot program, so viewer discretion is required.