Research on the six economies of the Gulf Cooperation Council
Category: Saudi Arabia
The Kingdom of Saudi Arabia covers the bulk of the Arabian Peninsula and has a land area of about 830,000 sq miles (making it the largest country in the Middle East). It is bordered by the Red Sea to the west; Jordan, Iraq, and Kuwait to the north; the Arabian (or Persian) Gulf, Bahrain, Qatar and the United Arab Emirates to the east; Oman to the southeast; and Yemen to the south. With a population of almost 32.2 million (as of 2025), Saudi Arabia is the fourth most populous country in the Arab world; yet there are actually only 18.8 million Saudis amongst this number. According to the EIU (2024), Saudi Arabia is ranked 150th (out of 167 countries and territories) on its Democracy Index and is thus categorised as an “authoritarian” state by the London-based think-tank.
The UAE and Saudi Arabia are now in blatant competition with one another. Competition is healthy, many will contend and this can be true but, if and when the times are more difficult such competition could become cut throat.
According to Abuamer and Nassar (2023), “soft power acquisition can also be used to explain how Gulf states approach sports.” Soft power, as Nye (2004) set out explain how some states acquire influence in non-confrontational ways and that sports investments can be explained by intra-Gulf rivalries, where competition rather than cooperation between Gulf states is arguably a key driver.
Competing for football glory; especially in the English Premier LeagueSaudi Arabia owns Newcastle United F.C.The Emirate of Dubai sponsors Arsenal F.C.The Emirate of Abu Dhabi both own and sponsor Manchester City F.C.
The Arabian peninsular seeks to become a default holiday destination
Its not just Dubai anymore.
Destination DohaDrift by Dhow; the Gulf’s once ubiquitous sail boats whose name may have come from the Persian for “small ship” (dawah) or from the Swahili for “vessel” (daw)
No longer just for pilgrimsLots to see, e.g., the UNESCO Al-Hijr monuments that date back to Nabataean civilizationTablet magazine in Jeddah, Saudi Arabia (Photo: Andrea Bruce)
And while it is no longer ‘just’ Dubai, it, Abu Dhabi and most other of the seven Emirates are all vying for tourists. It is said that the UAE will soon have a number of casinos. As it stands, and as I wrote recently, the UAE is the Middle East’s most popular destination be it as a conference location, convention centre or indeed holiday destination (Rutledge, 2023; 2024).
Some 21.5 m tourists visited in 2019 (UNWTO, 2023), a striking number considering that there are only around one million Emirati citizens (see: Arabian Gulf data). The meteoric growth in visitors is largely due to a proactive government strategy of infrastructural investment and destination brand-building (see, e.g., Chen and Dwyer, 2018). As Thani and Heenan (2017) state, in order to attract tourists the UAE has undergone some, “eye-catching transformations.” Notable amongst the cultural zones and theme park hubs are the world’s tallest structure (Burj Khalifa), biggest mall (The Dubai Mall), only seven-star hotel (The Burj Al Arab) and a satellite branch of France’s Louvre museum (Wippel, 2023). State controlled oil rent has facilitated the creation of two of the world’s largest airlines and airport hubs—Emirates and Etihad (DXB and AUH). In terms of marketing the UAE as an “escape to the sun” location, London’s English Premier League football club Arsenal, wear Emirates shirts and play home games at “Emirates stadium;” Manchester City wear Etihad shirts and play their home games at “ Etihad stadium” (Millington et al., 2021).
Chen, N., & Dwyer, L. (2018). Residents’ Place Satisfaction and Place Attachment on Destination Brand-Building Behaviors: Conceptual and Empirical Differentiation. Journal of Travel Research, 57(8), 1,026–1,041. https://doi.org/10.1177/0047287517729760
Millington, S., Steadman, C., Roberts, G., & Medway, D. (2021). The tale of three cities: Place branding, scalar complexity and football. In D. Medway, G. Warnaby, & J. Byrom (Eds.), A Research Agenda for Place Branding (pp. 131–149). Edward Elgar Publishing. https://doi.org/10.4337/9781839102851.00017
Rutledge, E. J. (2023). The tour guide role in the United Arab Emirates: Emiratisation, satisfaction and retention. Tourism and hospitality research, 23(4), 610–623. https://doi.org/10.1177/14673584221122488
Rutledge, E. J. (2024). The tour guide profession: An attractive option for UAE nationals majoring in tourism? Tourism and hospitality research, 0(online first), 1–12. https://doi.org/10.1177/14673584241278451
Thani, S., & Heenan, T. (2017). The UAE: A Disneyland in the desert. In H. Almuhrzi, H. Alriyami, & N. Scott (Eds.), Tourism in the Arab World: An Industry Perspective (pp. 104–117). Routledge. https://doi.org/10.4324/9781315624525
Wippel, S. (Ed.) (2023). Branding the Middle East: Communication Strategies and Image Building from Qom to Casablanca. De Gruyter. https://doi.org/10.1515/9783110741100
In a 2023 article for the Wall Street Journal (Said et al., 2023), it was revealed that Saudi Crown Prince Mohammed bin Salman (MBS) “has pulled away from his former mentor [U.A.E. President Sheikh Mohamed bin Zayed Al Nahyan; MBZ] as they compete to dominate the Gulf, where U.S. power has waned.” The rift, it is said, reflects a competition for geopolitical and economic power in the Middle East and global oil markets. The two royals — photoed together above — who spent almost a decade climbing to the top of the Arab world, are now feuding over who calls the shots.”
The two countries are also increasingly economic competitors. As part of MBS’s plans to end Saudi Arabia’s economic reliance on oil, he is pushing companies to move their regional headquarters to Riyadh, the Saudi capital, from U.A.E.’s Dubai, a more cosmopolitan city favored by Westerners. He’s also launching plans to set up tech centers, draw more tourists and develop logistical hubs that would rival the U.A.E.’s position as the Middle East’s center of commerce . In March, he announced a second national airline that would compete with Dubai’s highly ranked Emirates.
Said et al. (2020) site Gulf officials as saying that MBZ has, “chafed at being eclipsed by a Saudi royal who U.A.E. officials believe has made some serious missteps.” Moreover, in the realm of soft power, “the Saudi purchase in 2021 of Newcastle, England’s soccer club and investment in global superstar players took place just as Manchester City—owned by a prominent member of Abu Dhabi’s ruling family—became a title winning powerhouse.”
The Saudis and Emiratis have called themselves the closest of allies, but they have had a sometimes tense relationship since even before the U.A.E. gained independence from Britain in 1971. The U.A.E.’s founding father, Sheikh Zayed al Nahyan, bristled at Saudi domination of the Arabian peninsula, and then-Saudi King Faisal refused to recognize his Persian Gulf neighbor for years, seeking leverage in various territorial disputes. In 2009, the U.A.E. scuttled plans for a common Gulf central bank over its proposed location in Riyadh. To this day, there are territorial disputes over oil-rich land between the two countries.
The rift bubbled to the surface in October last year when OPEC, the 13-nation oil-production group that has allied with Russia , decided to slash oil output; the UAE went along with the cut, but in private told U.S. officials and the media that Saudi Arabia had forced it to join the decision. Emirati frustrations reached the point where they told U.S. officials they were ready to pull out of OPEC, according to Gulf and U.S. officials. U.S. officials said they took it as a sign of Emirati anger, not a real threat. At OPEC’s last meeting, in June, the Emiratis were allowed a modest increase in their production baseline, and their energy minister emerged holding hands with his Saudi counterpart.
As Iskandar (2024) writes, “in December 2022, MBS expressed his frustrations openly, accusing UAE officials of betrayal. It is said that the Saudi de facto ruler threatened punitive measures “worse than what it did to Qatar” (regarding the Qatar boycott, see: Al-Ansari, 2021). Saudi–UAE discord has been described as a mostly “quiet conflict” as these two dominant GCC countries vie for regional dominance and engage in geoeconomic competition. Rivalry has become more pronounced latterly as both anticipate a future less dependent on oil revenues and more focused on diversified economic growth” (see, e.g., Morgan, 2020; Reisinezhad & Bushehri, 2024).
The increasing activism in Saudi and Emirati regional policies is no longer based on money and diplomacy alone, as it used to be, but also on military means. They have intervened in Bahrain in 2011, in Libya in 2011, in Iraq and Syria against ‘Daesh’ — the now very much weakened Islamic State of Iraq and Syria (ISIS) — and in Yemen since March 2015 (Ragab, 2017, p. 37). Both countries are also said to be involved with the armed conflict that is ongoing in Sudan (see, e.g., Bissada, 2024; Gallopin, 2020; Mohammad, 2023; Pilling, England, & Schipani, 2023; Prendergast & Lake, 2024; Walsh, Koettl, & Schmitt, 2023).
Worth (2020), in a highly informative, longform profile piece on MBZ, writes that:
On Sept. 11, 2001, M.B.Z. was in northern Scotland, enjoying the last morning of a weeklong rabbit-hunting excursion with his friend King Abdullah II of Jordan. He said his goodbyes and boarded a private plane to London, arriving just after lunch. He hadn’t even left the plane when an Egyptian member of his entourage came running out from the terminal and climbed onboard, according to an official who was present. “New York is burning!” the man shouted. M.B.Z. had heard nothing of the day’s events, and when he did he was furious. “What are you saying?” he asked the man. “New York is the center of the world — look how vulnerable we are.” M.B.Z. tried to reach his father, but was unable to get through. He did manage to get Clarke, who was then working on counterterrorism in the White House. It was the only call Clarke took that morning from outside the government. “Carte blanche — just tell me what to do,” he recalled M.B.Z. telling him.
By the time M.B.Z. arrived back in Abu Dhabi, later that day, he knew that two Emiratis were among the 19 hijackers. The Sept. 11 attacks were a life-changing moment for M.B.Z., unmasking both the depth of the Islamist menace and the Arab world’s state of denial about it. That October, M.B.Z. told me, he listened in amazement as an Arab head of state, meeting with his father on a visit to Abu Dhabi, dismissed the attacks as an inside job involving the C.I.A. or the Mossad. After the head of state left, Zayed turned to M.B.Z., who had been there for the meeting, and asked what he thought. “Dad,” M.B.Z. recalled telling his father, “we have evidence.” That fall, the Emirati security services arrested about 200 Emiratis and about 1,600 foreigners who were planning to go to Afghanistan and join Al Qaeda, including three or four who were committed to becoming suicide bombers.
That same autumn, M.B.Z. had another conversation with his father that would affect the way he thought about political Islam. The encounter began, M.B.Z. told me, when he entered his father’s office with a momentous piece of news: The Americans were sending troops to Afghanistan. Zayed said he wanted Emirati troops to join them. M.B.Z., who was commanding the armed forces by this time, was not prepared for this. Taking an active role in the American campaign would raise sensitive issues, given that some were calling it a war against Islam. Sensing his son’s unease at the prospect of committing troops, Zayed said: “Tell me, do you think I’m doing this for Bush?” M.B.Z. said yes. “That’s 5 percent of it,” Zayed said. “Do you think I’m doing this to keep bin Laden away?” M.B.Z. nodded. “That’s another 5 percent.” M.B.Z., a little baffled, asked his father to explain. “You’ve read the Quran and the Hadith, the sayings of the Prophet,” Zayed said. “And you like them?” Of course, his son replied. Zayed then said: “Mohammed, do you think this guy bin Laden running around Afghanistan is doing what the Prophet wanted us to do?” Not at all, M.B.Z. said. His father then told him emphatically: “You’re right. Our religion is being hijacked.” M.B.Z. didn’t have to add that there was another reason to fight Al Qaeda — it was a threat to their own family’s authority.
In 1996, Osama bin Laden, the then head al-Qaeda issued his first fatwā, which declared war against the United States and demanded the expulsion of all American soldiers from the Arabian peninsula. In a second fatwā (1998), Osama bin Laden outlined his objections to American foreign policy with respect to Israel, as well as the continued presence of American troops in Saudi Arabia after the Gulf War (see: Maps of the Arabian peninsular). Osama bin Laden maintained that Muslims are obliged to attack American targets until the aggressive policies of the U.S. against Muslims were reversed. As of 1999, Bin Laden was residing in Afghanistan.
The aircraft hijackers in the September 11 attacks were 19 men affiliated with al-Qaeda. They came from four countries; 15 of them were citizens of Saudi Arabia, two were from the United Arab Emirates, one was from Egypt, and one from Lebanon.
In the aftermath of the “Arab Spring” Worth (2020) continues:
M.B.Z. had already hatched an immensely ambitious plan to reshape the region’s future. He would soon enlist as an ally Mohammed bin Salman, the young Saudi crown prince known as M.B.S., who in many ways is M.B.Z.’s protégé. Together, they helped the Egyptian military depose that country’s elected Islamist president in 2013. In Libya in 2015, M.B.Z. stepped into the civil war, defying a United Nations embargo and American diplomats. He fought the Shabab militia in Somalia, leveraging his country’s commercial ports to become a power broker in the Horn of Africa. He joined the Saudi war in Yemen to battle the Iran-backed Houthi militia. All of this was aimed at thwarting what he saw as a looming Islamist menace.
M.B.Z. makes little distinction among Islamist groups, insisting that they all share the same goal: some version of a caliphate with the Quran in place of a constitution. He seems to believe that the Middle East’s only choices are a more repressive order or a total catastrophe. It is a Hobbesian forecast, and doubtless a self-serving one. But the experience of the past few years has led some veteran observers to respect M.B.Z.’s intuitions about the dangers of political Islam writ large. “I was sceptical at first,” says Brett McGurk, a former United States official who spent years working in the Middle East for three administrations and knows M.B.Z. well. “It seemed extreme. But I’ve come to the conclusion that he was often more right than wrong.”
M.B.Z. has put many of his resources into what could be called a counter jihad, and they are formidable. Despite his country’s small size (there are fewer than a million Emirati citizens), he oversees more than $1.3 trillion in sovereign wealth funds, and commands a military that is better equipped and trained than any in the region apart from Israel. On the domestic front, he has cracked down hard on the Brotherhood and built a hypermodern surveillance state where everyone is monitored.
Hubbard reviewed by Ghattas
In a review of Ben Hubbard’s 2020 book, MBS: The Rise to Power of Mohammed Bin Salman, Ghattas writes in the New Statesman magazine (2020) that:
MBS’s grandiose reform plans are now under intense pressure. His ambition, laid out in Vision 2030 – a programme to lessen the country’s reliance on oil and bring about a more “vibrant” society – was the only reason the young prince became a darling of the West soon after he was catapulted on to the world stage in 2015. He did not deliver on his promise that by 2020 the kingdom would be able to live without oil. There are no revelations in MBS but Hubbard, Beirut bureau chief for the New York Times, who has spent more than a dozen years reporting from the region, delivers a compelling tale for a wide audience – more reportage than narrative, more anecdotes than deep analysis. In doing so, he provides non-experts with an accessible biography that does not stray into sensationalism but helps make sense of all the recent headlines around the impulsive, and one could argue, dangerous, young prince. MBS did not give an interview for the book and Hubbard is upfront about the gaps that remain in our understanding of a man who until just a few years ago did not seem destined to be more than one among thousands of princes in the House of Saud. As he writes:
Much still remains unclear about how MBS spent his twenties, largely because he did so little that drew attention at the time and because so much effort would later go into retroactively polishing his reputation. But what is clear is everything MBS did not do before he burst on to the scene in 2015. He never ran a company that made a mark. He never acquired military experience. He never studied at a foreign university. He never mastered, or even become functional in, a foreign language. He never spent significant time in the United States, Europe, or elsewhere in the West. And yet, this man, though still only crown prince, launched a devastating war in Yemen in 2015, played a high-risk gambit in the global oil market and chatted away on WhatsApp with another inexperienced princeling, Jared Kushner, Donald Trump’s son-in-law, discussing policies with consequences that reverberate around the world, including the stand-off with Iran.
MBS seemed to revel in the role of disrupter. In 2017 he went on a crusade against corruption, rounding up dozens if not hundreds of princes, businessmen and others in the Ritz Carlton hotel, stripping them of their fortunes and provoking an economic earthquake in the kingdom. But while there was indeed mass corruption in Saudi Arabia, Hubbard argues that it was in an environment “created by the royal family” and those princes who were still on MBS’s good side could continue to profit. Just like MBS himself, who appeared not to see the contradiction between what he preached and his own spending habits, buying a $300m house, a super-yacht and, reportedly, Leonardo da Vinci’s painting Salvator Mundi for $450m. The prince’s excesses and rough edges were dismissed by those he charmed, from Silicon Valley to Washington, DC. He dangled the prospect of huge deals and investment opportunities in the kingdom, of cities rising in the desert where “scientists could modify the human genome to make people smarter and stronger. Mechanical dinosaurs could populate a Jurassic Park-like attraction… A beach would feature glow-in-the-dark sand.”
Here, finally, was a young man with vision who could bring the kingdom into the 21st c. And in many ways, MBS did go where no other royal had gone. He defanged the religious police and brought music, cinema and theatre to the austere kingdom where they had been deemed a sin for centuries. He understood this was essential to defuse the time bomb of a very young and very bored, frustrated population. He also reversed the ban on women driving – while jailing the women who had campaigned for the right to drive lest anyone get any ideas about the power of activism in an absolute monarchy.
In an interesting profile piece on MBS, Pelham (2022) writes:
At first glance the 36-year-old prince looks like the ruler many young Saudis had been waiting for, closer in age to his people than any previous king – 70 per cent of the Saudi population is under 30. The millennial autocrat is said to be fanatical about the video game “Call of Duty”: he blasts through the inertia and privileges of the mosque and royal court as though he were fighting virtual opponents on screen. His restless impatience and disdain for convention have helped him push through reforms that many thought wouldn’t happen for generations. The most visible transformation of Saudi Arabia is the presence of women in public where once they were either absent or closely guarded by their husband or father. There are other changes, too. Previously, the kingdom offered few diversions besides praying at the mosque; today you can watch Justin Bieber in concert, sing karaoke or go to a Formula 1 race. A few months ago I even went to a rave in a hotel. Saudis and foreigners danced barefoot on the sand until dawn, a couple kissed, women stripped down to tank tops and fruit juice laced with alcohol was served at an open bar. But embracing Western consumer culture doesn’t mean embracing Western democratic values: it can as easily support a distinctively modern, surveillance state. On my recent trips to Saudi Arabia, people from all levels of society seemed terrified about being overheard voicing disrespect or criticism, something I’d never seen there before. “I’ve survived four kings,” said a veteran analyst who refused to speculate about why much of Jeddah, the country’s second-largest city, is being bulldozed: “Let me survive a fifth.”
In another very in-depth profile piece on MBS, Wood (2022) writes:
Even MBS’s critics concede that he has roused the country from an economic and social slumber. In 2016, he unveiled a plan, known as Vision 2030, to convert Saudi Arabia from—allow me to be blunt—one of the world’s weirdest countries into a place that could plausibly be called normal. It is now open to visitors and investment, and lets its citizens partake in ordinary acts of recreation and even certain vices. The crown prince has legalized cinemas and concerts, and invited notably raw hip-hop artists to perform. He has allowed women to drive and to dress as freely as they can in dens of sin like Dubai and Bahrain. He has curtailed the role of reactionary clergy and all but abolished the religious police.
Before the meetings, I asked one of MBS’s advisers if there were any questions I could ask his boss that he himself could not. “None,” he answered, without pausing—“and that is what makes him different from every crown prince who has come before him.” I was told he derives energy from being challenged. At the outset of both conversations, MBS said he was saddened that the pandemic precluded giving us hugs. He apologized that we all had to wear masks. (Each meeting was attended by multiple, mainly silent princes wearing identical white robes and masks, leaving us unsure, to this day, who exactly was present.)
The crown prince left his tunic unbuttoned at the collar, in a casual style now favored by young Saudi men, and he gave relaxed, non-psychopathic answers to questions about his personal habits. He tries to limit his Twitter use. He eats breakfast every day with his kids. For fun, he watches TV, avoiding shows, like House of Cards, that remind him of work. Instead, he said without apparent irony, he prefers to watch series that help him escape the reality of his job, such as Game of Thrones.
Vision 2030 made modernisation easier to observe now than it would have been just a few years ago. Until October 2019, tourist visas to Saudi Arabia did not exist. Then the Saudis realised that to attract crowds to the concerts they had legalised, they’d need to let in visitors. Overnight, a visa to Saudi Arabia went from one of the hardest in the world to get to one of the easiest. In minutes I had one valid for a whole year.
Yet after spending hours in MBS’s company, and in the company of his allies and enemies, I was convinced that neutering the clergy was not just symbolic. He was fighting them avidly, and personally. “The kings have historically stayed away from religion,” Bernard Haykel, a scholar of Islamic law at Princeton and an acquaintance of MBS’s, told me. Outsourcing theology and religious law to the big beards was both an expedient and a necessity, because no ruler had any training in religious law, or indeed a beard of any significant size. By contrast, MBS has a law degree from King Saud University and flaunts his knowledge and dominance over the clerics. “He’s probably the only leader in the Arab world who knows anything about Islamic epistemology and jurisprudence,” Haykel told me.
That being said, the conservatism in Saudi society has not gone away, rather in many instances, it has just undergone a “costume change;” as Wood (2022) continues:
These lingering manifestations of intolerance illustrate what MBS’s critics say is his ultimate error: Even a crown prince can’t change a culture by fiat.
Belated realisation of this error might be behind the grandest and most improbable of his projects. If existing cities resist your orders, just build a new one programmed to do your bidding from the start. In October 2017, MBS decreed a city in a mostly uninhabited area on the Gulf of Aqaba, adjacent to Egypt’s Sinai Peninsula, the southwestern edge of Jordan, and the Israeli resort town Eilat. The city is called Neom, from a violent collision between the Greek word neos (“new”) and the Arabic mustaqbal (“future”).
At present, little exists but an encampment for the employees of the Neom project (see: “On the giga-scale”), a small area of tract housing. Regular buses take them to shop in the nearest city, Tabuk, which is itself a city only by the standards of the vacant, rock-strewn desert nearby. (If you recall the early scenes of Lawrence of Arabia, when a lonely camel-borne Peter O’Toole sings “The Man Who Broke the Bank at Monte Carlo” to the echoes of a sandstone canyon, then you know the spot.) The ambitions for this settlement are vast. Neom’s administrators say they expect it to attract billions of dollars in investment and millions of residents, both Saudi and foreign, within 10 to 20 years. Dubai grew at a similar pace in the 1990s and 2000s. MBS said Neom is “not a copy of anything elsewhere,” not a xerox of Dubai. But it has more in common with the great globalised mainstream than with anything in the history of a country that, until recently, was remarkably successful at walling off its traditional culture from the blandishments of modernity.
This is how the profile piece, penned by Robert F. Worth in 2020, on MBZ ends; it is telling indeed:
One morning in June, I got a taxi from my hotel to the Louvre Abu Dhabi, M.B.Z.’s madly ambitious, billion-dollar monument to “art and civilization.” It was unbearably hot and humid out, and as we drove past the corniche — a beautifully landscaped mile-long stretch of waterfront — I didn’t see a single human being. As we crossed the bridge onto Saadiyat Island, I could see the museum looming in the distance like a vast metallic tortoise. Its steel dome, which is as heavy as the Eiffel Tower, is a weave of strands designed to act like a palm grove, allowing tiny shards of sunlight onto the grounds below. … Inside, I goggled alongside the tourists at classic works of Western art sitting alongside Chinese and Indian and Arab masterpieces. The museum’s guiding concept reflects the U.A.E.’s own multicultural ethos, a mash-up of global high culture. It has been derided by some critics, including many in France, as a lavish purchase of a European brand for the benefit of a global leisure class. But M.B.Z.’s main goal for the museum, one of his advisers told me, was to educate the local population, not attract tourists.
As I strolled past a Roman sculpture, a group of Emirati schoolchildren in green shirts trickled in and sat on the floor around me. After a few minutes of sketching, their teachers led them toward the Universal Religions gallery, the museum’s centrepiece. I followed behind and listened as one of the teachers led a Q. and A. “You all know about the Quran,” he said. “But who can tell me what the Christian holy book is?” Several children shouted the answer. “Very good! What about the Jewish holy book? And for Hindus?” More high-pitched answers. At last came the clincher. “Sheikh Zayed wanted this to be a universal museum, and he had the idea to put all the holy books in one place, so people could see what their religions had in common, and perhaps that way they’d be a bit nicer to each other.” As the children got up and filed into the next room, it struck me that the teacher’s lecture contained a revealing false note. Sheikh Zayed wasn’t the one who conjured up this museum, with its grand ambition to smash Islamic certainties and turn Bedouins into citizens of the world. M.B.Z. was hiding in his father’s shadow, absent and omnipotent at the same time.
More generally, all Arabian Gulf countries adopted monarchy as a political system, what emerged was a tribal dynastic monarchy in that the extended families were included as part of an extended royal family. Indeed, this characteristic distinguishes these monarchies of the Gulf region from the majority of other monarchical systems that have existed internationally. Wright (2020, p. 352) points out that, “the pattern of including members of the ruling family as ministers in the cabinet was an important indicator of the distribution of power and authority.” According to Al-Rasheed (2020, p. 337), “the long-term prospects of the contradictory strategy of reform and repression are bleak” as this will result in a spiral of “violence and retaliation, alienating the youth that the regime supposedly wants to empower.”
Further reading
Surveillance / internet control
In 2017, the Saudi government urged citizens to report subversive comments spotted on social media via a phone app which was promptly denounced by Saudi dissidents and U.S.-based Human Rights Watch as “Orwellian” (Reuters, 2017). As reported by Mazzetti and Hubbard (2019) , MBS had authorised “a secret campaign to silence dissenters—which “included the surveillance, kidnapping, detention and torture of Saudi citizens” — see too: Bing and Schectman (2019b) and Deibert (2023).
Over the last five years, the UK has sold over £75 million ($103mn) worth of spyware, wiretaps, and telecom interception equipment to spy on dissidents, to over 17 countries including Saudi Arabia, the UAE and Bahrain. Further, in 2020 alone, the UK has authorised £1.88 billion ($2.6bn) worth of arms sales to the Saudi-led coalition in war-torn Yemen (TNT World, 2021).
In 2023, social media users were arrested or fined for their online posts (Freedom House, 2023). Bahrain, Saudi Arabia and the UAE are amongst the most connected countries in the world, this gives the country a particularly high score for this component of their Internet Freedom score — masking, to an extent, quite how poorly they sources in other regards. In terms of internet access in Saudi Arabia, users “face extensive censorship and surveillance, which limits their ability to access diverse content or speak freely online” (Freedom House, 2023). While internet access is widespread and most social media and communications platforms are available, authorities routinely block websites, remove content, and deliberately manipulate online information to positively portray the government and its policies. Criticism of the government is not tolerated and the threat of harassment or prosecution under broadly worded laws forces many Saudi social media users to self-censor. “The regime relies on extensive surveillance, the criminalisation of dissent, appeals to sectarianism and ethnicity, and public spending supported by oil revenues to maintain power. In 2020, Saudi authorities “requested that platforms such as Netflix and YouTube remove online content deemed “inappropriate,” and threatened legal action should the platforms not comply with the requests” (Freedom House, 2023). It was established that the government has recruited Saudi-based Wikipedia administrators to deliberately manipulate information on pages related to the country (Freedom House, 2023). Regarding the UAE. internet freedom is significantly restricted. Online censorship is rampant, and the online media environment lacks diversity. Government surveillance of online activists and journalists is pervasive and has forced internet users to extensively self-censor. Authorities and government supporters continue to use increasingly sophisticated technology to spread disinformation that advances pro-UAE domestic and international narratives on social media.
Leading efforts to pre-emptively stifle possible threats to regime security have been Saudi Arabia and the UAE. These two countries have been mobilising cutting-edge surveillance technology and foreign expertise to suppress dissent within their borders and amongst their citizens abroad (Bing & Schectman, 2019a, 2019b; Uniacke, 2021, p. 980). Uniacke (2021) argues that most of the Gulf monarchies seek to depoliticise and de-civilise online debate through promoting regime-friendly narratives that expose, criticise, crowd-out, delegitimise and ultimately deter political dissidents.” “Saudi security officials sought to galvanise regime supporters into policing the online space, adding an extra layer of surveillance capability to their already muscular communications interception technology. The public prosecutor reminded social media informants – otherwise known as ‘electronic flies’ – that the Kingdom’s laws saw terrorism as ‘endangering national unity . . . and harming the state’s reputation or status … by such an interpretation, voicing political opposition beyond the parameters of acceptable debate set by the regime is ultimately equated with extremism and terrorism” Uniacke (2021, pp. 979-980). Simultaneously, they aim to ‘de-civilise’ civil society, encouraging intolerance for pluralistic political arguments beyond the state narrative to engineer an online quasi-debate with clearly defined political and cultural limitations to easily identify dissenters and buttress regime security (Uniacke, 2021, p. 980).
As Uniacke (2021, p. 981) argues, the forming of a specific, thematically defined ‘free’ space for online debate has become a function of digital authoritarianism in itself. … Exacerbating this online opinion engineering is the coercive potential of commercial big data, easily repurposed for political intelligence on citizens’ opinions and habits by authoritarian and democratic governments alike.
Indeed, the Saudi and Emirati regimes show a demonstrable intolerance for any dissenting political narratives that may be considered expressions of freedom, an independent civil society or reform even within the prevailing system that contradicts the national ‘Vision.’ Instead, they are attempting, with varying degrees of execution of success, to galvanise the citizenry to perform economically while simultaneously suppressing politically-minded civil society. … “if adult citizens take on new jobs, responsibilities, and lifestyles willingly, then ruling elites do not have to undertake painful structural reforms – and risk their own necks, politically, to make them do so” (Uniacke, 2021, p. 985).The Saudi regime’s instrumentalisation of the online public sphere relies on leveraging artificial ‘public opinion’ by both mechanical and organisational means in order to galvanize organic reactions that directly or indirectly promote regime policy. The debate is intentionally stripped of its civil dimension; intolerance for pluralism and an atmosphere of ‘fear and loathing’ prevail by way in an interactive process of coercion, drawing citizens into the parameters of regime-friendly debate and thus depoliticising their engagement with the online space (see too: Pan & Siegel, 2020).
References
Al-Ansari, M. M. H. (2021). The Unbridgeable Gulf: Applying Bennett’s Model of Analysis to the 2017 Gulf Crisis. Journal of Balkan and Near Eastern studies, 23(3), 502–515. https://doi.org/10.1080/19448953.2021.1888252
Deibert, R. J. (2023). The Autocrat in Your iPhone: How Mercenary Spyware Threatens Democracy. Foreign Affairs, 102(1), 72–88. https://www.foreignaffairs.com/world/autocrat-in-your-iphone-mercenary-spyware-ronald-deibert
Pan, J., & Siegel, A. A. (2020). How Saudi Crackdowns Fail to Silence Online Dissent. The American political science review, 114(1), 109–125. https://doi.org/10.1017/S0003055419000650
Ragab, E. (2017). Beyond Money and Diplomacy: Regional Policies of Saudi Arabia and UAE after the Arab Spring. The International Spectator, 52(2), 37–53. https://doi.org/10.1080/03932729.2017.1309101
Uniacke, R. (2021). Authoritarianism in the information age: state branding, depoliticizing and ‘de-civilizing’ of online civil society in Saudi Arabia and the United Arab Emirates. British Journal of Middle Eastern Studies, 48(5), 979–999. https://doi.org/10.1080/13530194.2020.1737916
Wright, S. (2020). Political absolutism in the Gulf monarchies. In M. Kamrava (Ed.), Routledge Handbook of Persian Gulf Politics (pp. 346–356). Taylor & Francis Group.
President Xi Jinping with Saudi Crown Prince Mohammed bin Salman Al Saud in December of 2022. Xinhua/Alamy Stock Photo
At the end of November 2022, UK prime minister Rishi Sunak announced that the “golden era” between Great Britain and China was over. China may not have been too bothered by this news however, and has been busy making influential friends elsewhere.
In early December, Chinese president Xi Jinping met with the Gulf Cooperation Council (GCC) – a group made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – to discuss trade and investment. Also on the agenda were talks on forging closer political ties and a deeper security relationship.
This summit in Saudi Arabia was the latest step in what our research shows is an increasingly close relationship between China and the Gulf states. Economic ties have been growing consistently for several decades (largely at the expense of trade with the US and the EU) and are specifically suited to their respective needs.
Simply put, China needs oil, while the Gulf needs to import manufactured goods including household items, textiles, electrical products and cars.
China’s pronounced growth in recent decades has been especially significant for the oil rich Gulf state economies. Between 1980 and 2019, their exports to China grew at an annual rate of 17.1%. In 2021, 40% of China’s crude oil imports came from the Gulf – more than any other country or regional group, with 17% from Saudi Arabia alone.
China has been using over 14 million barrels of oil a day since 2019. Nate Samui/Shutterstock
China has benefited from increasing demand for its manufactured products, with exports to the Gulf growing at an annual rate of 11.7% over the last decade. It overtook the US in 2008 and then the EU in 2020 to become the Gulf’s most important source of imports.
These are good customers for China to have. The Gulf economies are expected to grow by around 5.9% in 2022 (compared with a lacklustre 2.5% predicted growth in the US and EU) and offer attractive opportunities for China’s export-orientated economy. It is likely that the fast-tracking of a free trade agreement was high on the summit’s agenda in early December.
Strong ties
The Gulf’s increased reliance on trade with China has been accompanied by a reduction in its appetite to follow the west’s political and cultural lead.
As a group, it was supportive of the west’s military action in Iraq for example, and the broader fight against Islamic State. But more recently, the Gulf notably refused to support the west in condemning Russia’s invasion of Ukraine. It also threatened Netflix with legal action for “promoting homosexuality”, while Qatar has been actively banning rainbow flags supporting sexual diversity at the FIFA men’s World Cup.
So Xi’s visit to Saudi Arabia was well timed to illustrate a strengthening of this important partnership. And to the extent that anything can be forecast, a deepening of the Gulf-China trade relationship seems likely. On the political front, however, developments are less easy to predict.
China is seeking to safeguard its interests in the Middle East in light of the Belt and Road initiative, its ambitious transcontinental infrastructure and investment project.
But how much further might the Gulf states be prepared to sacrifice their longstanding security pacts with western powers (forged in the aftermath of the second world war) in order to seek new ones with the likes of Beijing? Currently, America has military bases (or stations) in all six Gulf countries, but it is well documented that the GCC is seeking ways to diversify its self-perceived over-reliance on the US as its primary guarantor of security (a sentiment within the bloc that was pronounced while Obama was president, less so with Trump, but on the rise again with Biden).
In the coming period, the GCC will need to decide which socioeconomic path to pursue in the post-oil era where AI-augmented, knowledge-based economies will set the pace. In choosing strategic ties beyond trade alone, the Gulf states must ask whether the creativity and innovative potential of their populations will be best served by allegiances to governments which are authoritarian, or accountable.
The world should push the crown prince to reform Saudi Arabia, not wreck it
In a kingdom where change comes only slowly, if at all, the drama of recent days in Saudi Arabia is astounding. Scores of princes, ministers and officials have been arrested or sacked, mostly accused of corruption. Many of those arrested are being held in the splendour of the Ritz-Carlton hotel in Riyadh. About $800bn-worth of assets may have been frozen. At the same time a missile fired from Yemen was intercepted near Riyadh, prompting Saudi Arabia to accuse Iran of an “act of war”.
Upheaval at home and threats of war abroad make a worrying mix in a country that has, hitherto, held firm amid the violent breakdown of the Middle East. The world can ill afford instability in the biggest oil exporter, the largest Arab economy and the home of Islam’s two holiest sites.
At the centre of the whirlwind stands the impetuous crown prince, Muhammad bin Salman, son of the aged King Salman. The prince has staged a palace coup—or perhaps a counter-coup against opponents seeking to block his sweeping changes (see article). Either way, at the age of just 32, he has become the most powerful man in Saudi Arabia since King Abdel-Aziz bin Saud, who founded the state. All this may be the precursor to profound reforms that the country needs. The danger is that it will just lead to another failed one-man Arab dictatorship.
Casting himself as a champion of the young, Prince Muhammad (known as MBS) understands that his country must reinvent itself to deal with the end of the oil boom, a burgeoning and indolent population, and a puritanical Wahhabi religious ideology that has been a Petri dish for jihadism. He has set out ambitious plans to harness private firms to reform the state and wean the country off oil. He has also eased some social strictures, promising to end the ban on women drivers and restraining the religious police. He speaks of returning to a “moderate Islam open to the world and all religions”.
All this is welcome. But the way the prince is going about enacting change is worrying. One reason is that his ambition too often turns to rashness. He led an Arab coalition into an unwinnable war in Yemen against the Houthis, a Shia militia, creating a humanitarian disaster. He has also sought to isolate Qatar, a gas-rich neighbour, succeeding only in wrecking the Gulf Co-operation Council and pushing Qatar towards Iran. With fewer constraints, he could become still more reckless. He is rattling the sabre at Iran over the war in Yemen, and may be challenging it in Lebanon. During a visit to Riyadh, the Saudi-backed Lebanese prime minister, Saad Hariri, announced that he would step down, and denounced interference by Iran and its client militia, Hizbullah (see article). What precisely the Saudis intend to do in Lebanon is unclear. But many worry about a return to violence in a country scarred by civil war and conflicts between Hizbullah and Israel.
Another concern is the economy. Prince Muhammad’s plan for transformation relies in part on luring foreign investors. But they will be reluctant to commit much money when someone like Alwaleed bin Talal, a prince and global investor, can be arrested on the crown prince’s say-so (see article). Last month Prince Muhammad made a pitch to foreign investors for a new high-tech city filled with robots, NEOM. The glitzy event took place in the same hotel complex that is now a prison.
A third cause for disquiet is the stability of the monarchy. Saudi rule has hitherto rested on three pillars: consensus and a balance of power across the sprawling royal family; the blessing of Wahhabi clerics; and a cradle-to-grave system of benefits for citizens. Prince Muhammad is weakening all three by concentrating power in his own hands, pushing for social freedoms, and imposing austerity and privatisation.
Much of this had to change. He could seek new legitimacy by moving towards greater debate and consultation. Instead, space for dissent is disappearing and executions are rising. The anti-corruption campaign is being carried out with little or no due process to determine who is guilty of what. Many ordinary Saudis are cheering for now. But the arrests look like Xi Jinping’s purges in China, not the rule of law. As he meets resistance and his base narrows, the crown prince may rely increasingly on the security apparatus to silence critics. That would only repeat the mistakes of republican Arab strongmen: socially quite liberal, but repressive and ultimately a failure.
Many have predicted the fall of the House of Saud, only to be proved wrong. The most likely alternative to its rule, flawed as it is, is not democracy but chaos. The country would fragment and, in the scramble for its riches, Iran would extend its power, jihadists would gain a new lease of life and foreign powers would feel compelled to intervene.
The world must fervently hope that Prince Muhammad’s good reforms succeed, while urging restraint on his bad impulses. President Donald Trump is wrong to cheer the purge on. The West should instead counsel the prince to act with caution, avoid escalation with Iran and free political life at home. Prince Muhammad may be heeding the dictum of Niccolò Machiavelli that it is better for a prince to be feared than loved. But this advice comes with a rider: he should not be hated.
So the GCC central bank might come to Abu Dhabi. The statement has since been retracted, but it was a headline last week, and would be some sort of coup for the UAE.
For many observers, however, the bigger story lay underneath in any case, in the apparent confirmation by Central Bank Governor Al Suwaidi that the US dollar will be abandoned in its role of currency peg, not by 2010, but by 2015.
If confirmed, it raises all sorts of questions, not just for the monetary regime and economies of the Gulf countries, but maybe for the dollar itself, hitherto pretty much unchallenged as the world’s unofficial reserve currency.
Central banks around the globe have stockpiled it in their reserves, and the Asian countries running huge trade surpluses have found themselves recycling those funds back whence they came, not only for investment opportunity but to help cover their own exposure.
The US has been able to run increasingly heavy deficits accordingly. Not even the triumphalist emergence of the euro took too much of a shine off the dollar’s pre-eminence. But if the creditor countries, in whole or in part ditched their traditional benchmark, this perpetual motion model might be under threat. It may be an unduly alarmist view, but it’s worth scouring around for some answers to the general proposition of a dollar implosion.
Some of the facts are plain and their implications unavoidable. US deficits imply dollar weakness for some time to come. “Some are suggesting that one of the reasons for current euro and sterling strength is that oil surpluses are [already] favouring those currencies,” Philip Khoury, Head of Research at EFG-Hermes, observes.
“Likely US slowdown driven by weaker consumption is likely to [bring it down further] due to lower interest rates.” The outlook seems no better. “Rising external indebtedness does not portend well for the dollar’s role.”
There are many who would agree with that prognosis. “We continue to be dollar bears over the medium-term”, says Steve Brice, Head of Regional Research at Standard Chartered. Even so, the idea of breaking easily from the dollar meets with little bullishness. The relationship has been in place for so long, there is a certain comfort zone involved. Jasim Ali, Head of the Economic Research Unit, University of Bahrain, believes “GCC states tend to avoid change and risks. I think the GCC states would most likely avoid other arrangements, despite some of the statements made.”
The picture may be muddier than that, however, insofar as the GCC states have differing levels of motivation. “States that are more diversified (like Oman, Bahrain and the UAE) have less of an incentive to keep the dollar peg,” opines Jane Kinninmont, economist at the Economist Intelligence Unit. That’s an issue which may still delay monetary union anyway, she suggests.
There’s another reason to be cautious. “I’d be surprised if the single currency were to float,” Gulf analyst Robert Powell, also of EIU, remarks. “It would expose the single currency to the vagaries of the oil market, would create uncertainties for firms looking to invest in the GCC, and could also be a setback for those states’ efforts to diversify their economies.”
So the prospect of setting the GCC currencies free may be dimmer than supposed. But what if it did happen? Would that be serious?
Any such shift, particularly if oil were to be priced in different currencies, may exacerbate the dollar’s downtrend, Brice at Standard Chartered confirms. “To some degree this would be a fundamental issue, in both current account and capital account transactions from the region. However, it could also have a significant psychological impact, as a step towards a shift in hegemony.”
That said, there is no obvious replacement at this juncture, he continues. “Europe and Japan are still struggling economically, and the Chinese yuan is still a long way from being a reserve currency.”
Therefore, the US dollar is likely to remain kingpin for years to come, it would seem. Brice reiterates the importance of the US to the rest of the world. “As such, we expect any such reduction in reliance on the dollar to be gradual.”
Amid this conjecture, the bolder line is to say that the hour of the independent regional currency is fast approaching. “I feel it is about time the GCC states allow their common currency to float. This would enable them to really determine their competitive situation in the world market,” says local economist and entrepreneur Abdullah Sharafi.
Emilie Rutledge, visiting professor at the UAE University, goes further, anticipating the creation of a Gulf ‘dinar’ which might itself displace the dollar in central bank accounts. “From a geo-political context, the dinar may be perceived as more morally acceptable than holding the US dollar, and also a more Islamically-acceptable currency to hold either in reserve or indeed even to peg to.” That thought cannot be too far from the authorities’ minds, although it puts the regional order and international relations right into the melting pot.
Yet, while the system of the US swapping paper greenbacks for manufactures and commodities is losing viability, it will still be the decisions made by China which will carry far greater weight, Rutledge maintains. At the same time, a certain fatalism applies. Sharafi argues: “The USA is a superpower, behaves like a superpower, and is treated as a superpower. These monetary changes would not affect its position. The two are just not linked.” Whatever lies ahead, uncertainty prevails for now. Once the GCC countries have resolved the currency matter, clarity should ensue.
“It is important that the central bank’s intentions are flagged some time in advance, so businesses can protect themselves against the different currency and interest rate exposures they will face,” says Brice, ushering in the risk management story.
Risk indeed there is, but the dollar might itself sail serenely into its sunset. And, since the world is round, it might even return from the other side. Tomorrow is another day.
Andrew Jeffreys, Editor in Chief of Oxford Business Group, puts it as succinctly. “2015 is far off, and conditions may change,” he reminds. Hard to argue with that.
Calls to scrap the GCC’s fixed relationship with the dollar have to reckon with the alternatives
If you are invited to a presentation about corporate ethics hedging, it may take you a moment to grasp the concept. Since ‘ethical investment’ has become an established term, the phrase actually trips off the tongue. However, I’m glad to say it didn’t sound right when I heard it down the telephone. It suggested something implicitly like the route to an Enron-type result. Even if a company wanted to ‘hedge’ its ‘ethics’, would there be anyone proudly advertising such a service, let alone a well-known and reputable institution?
Better, of course, to hear clearly what you’re being told. Corporate FX hedging is the name of the game, and Standard Chartered Bank is talking that book. The much-awaited US dollar slide may be under way, and there is business to be had in offering protection against such foreign-exchange risk exposure.
That’s not the most interesting bit of the bank’s recent research report, however (in case you were wondering). It’s not even the second most interesting bit which, to me at least, was the forecast of the British pound falling even against a falling dollar over the course of the year. (The idea that the UAE dirham might still rise against sterling makes dollar-equivalent earnings less troubling to a British expat.)
And, on an infinitely bigger scale, that is the kind of issue which is the real story. It’s about not only risk, but real returns, to the Gulf countries as a whole.
Standard Chartered Bank recommends that the proposed GCC single currency should de-peg from the US dollar. It is not alone in that. The Dubai Chamber of Commerce and Industry implied as much in an economic bulletin a year ago, saying that floating would allow independent policy-making and avoid the same fate as the dollar.
The Gulf Research Center in Dubai has been discussing the issue on and off for some while. Indeed, many have wondered aloud on this topic, while not all committing to a verdict. But the bank has repeated it, again, and argued a case.
Decision time?
If such a decision came, it would undoubtedly be a bold step, with significant implications. The currency itself may still be some way off, with occasional rumours that the 2010 deadline is in doubt. Yet, though timing is undoubtedly important (and especially so if the problem to be resolved is here and now), that’s actually not the key point. Why, in fact, suggest such a radical step for a region whose currencies have mostly been pegged to the dollar for decades, which has not been especially troubled in doing so, and indeed now appears to be flourishing?
The bank’s reasoning, amid its carefully-defined research, boils down to two points, both easily accessible.
First, it is not in the best interests of the Gulf countries for their currencies to go down with the (apparently) sinking ship which is the dollar. While exports are mostly dollar-denominated, imports are substantially in other currencies, which would therefore become more expensive. That’s clear enough, leaving aside for the moment the incendiary topic of whether oil should continue to be priced in dollars.
Second, running domestic monetary policy in line with US policy (i.e., setting interest rates in parallel to the US Federal Reserve) always runs a risk, namely that the policy stance is inappropriate (too lax or too tight) for local conditions. The trade-off between the confidence generated by the fixed relationship on the one hand and policy inflexibility on the other is the core conundrum, and an increasingly live issue now, when interest rates seem considerably too low for the Gulf’s rampant economies.
They explain it further. The decline of the dollar against the euro through 2000-2004 increased the GCC’s import bill. The subsequent decline against Asian currencies too, projected to continue, represents a further “threat to the bottom line”. That currency mismatch applies also to budgets, where revenues are also mostly dollar-denominated, but spending frequently is not.
At the moment, whereas the dollar peg brings useful certainty vis-à-vis the dollar, with the hydrocarbon sector still so dominant it means that the impact of oil-price fluctuation is imparted fully to the real economy. Some form of currency float would allow the exchange rate (and interest rates) to take some of the strain.
Moreover, “Forex diversification is likely to become an increasingly important theme going forward” at the global level, so that having 90 per cent + of reserves in the dollar “is not necessarily appropriate any more”. A couple of diplomatic euphemisms there. In layman’s terms, if Asian central banks, Russia and others are going to flee the dollar, it may be better to be with them rather than trying to hold the fort.
“We believe the dollar is overvalued, and therefore could be subject to a significant correction,” says Standard Chartered. While that forecast appears cannily hedged itself, the warning is clear. The recommendation is that the planned GCC currency “should be marked against a trade-weighted basket instead”.
At one level, the logic is compelling. The idea that the Gulf region selling oil lucratively at $70 and in huge surplus should be tied to the dollar, with America in chronic deficit and buying expensively at the same price, does have a ring of absurdity about it. But is it as simple as that?
Stepping back, a barrage of advice has come over the years from the IMF (the same IMF which last week called for dollar devaluation). The outcome, however, has been inconclusive. While agreeing that a more flexible exchange rate policy may become desirable as the GCC economies become more diversified and integrated with world markets, it has generally found that a trade-weighted basket peg would be no better than a dollar peg in procuring stability, and the flexibility versus credibility debate becomes no clearer, though a euro/dollar combination may offer a reasonable alternative.
At the Gulf Research Center, economist Emilie Rutledge seems more convinced. As the “GCC’s economies are maturing and diversifying rapidly” the current inability to set their own monetary policy “is far from optimal”. Additionally, “as a longer-term investment the euro looks more promising than the dollar”.
She raises the further matter of the creation of a single GCC currency (the ‘Gulf dinar’) itself creating downward pressure on the dollar, as the oil-producing countries will invest more at home instead of (as previously) in dollar assets. The dinar may itself attain reserve status, especially if oil were priced in the same terms, though there would be “political disquiet” from the US in that event which is another understatement. It should all give further pause for thought.
Wouldn’t the GCC states be prejudicing the value of their own existing reserves if they (effectively) acted against the dollar, whether by diversifying their assets, de-pegging, or pricing oil differently? In an environment of very high oil prices, could it actually be done without serious revaluation, which would jeopardise emerging non-oil activities and, ironically, call for (entirely inappropriate) lower interest rates? Not pegging risks the GCC tent being blown about by a potentially storm-force wind.
Standard Chartered Bank’s analysis suggests that flexibility will be manageable. The authorities could still offset current account inflows by capital outflows (though less into dollars), and would simply have to judge whether the exchange rate or interest rate were their priority.
So there it is. I’m not entirely convinced, but perfectly well accept that the GCC may have outgrown the peg. Meanwhile, it’s worth remembering that no exchange-rate regime on its own delivers a definitive economic framework. Fiscal control and structural matters remain beasts which have to be tamed for a successful, overall strategy.
Also, we are still talking about 2010. By my calculation, that’s getting on for four years away. The dollar might still be ‘weak’ and the euro ‘strong’. We cannot know. But, won’t the markets have moved on a bit by then?
On the practical side, the European Central Bank is offering the GCC states advice, and their technocrats are probably among the least objectionable of the EU’s infrastructure. Whether the euro will appear in the policy mix is then an intriguing issue. Europe does not have much call for an even higher dollar exchange rate, but it does like gestures denoting prestige.
There’s another idea I could mention. If the GCC is on the lookout for another possible fix, like a ready-made US dollar & euro basket, it could consider a fairly heavyweight international currency which already fits that description. Despite the fact that it has been threatened with expiry, including by ministers and (almost hysterically) by so-called experts in its own country, it’s been around a very long time and it still works. It is far less volatile historically than either the dollar or the euro (see chart), because its balance of payments is relatively evenly exposed to both. You may even have heard of it. It’s called sterling: the British pound. Snag is: Standard Chartered do say it will fall faster than the dollar. Maybe. Anyway, it’s just a thought.
Insights
“Of course, de-pegging would imply appreciation of all GCC currencies. In 2005, the combined current account surplus of the six GCC states is estimated at approximately $160 billion, with net foreign assets in the banking system (excluding reserves accumulated in stabilisation funds) at approximately $260 to $300 billion. With a positive outlook for crude oil prices over the medium term in addition to capital inflows, all GCC states will have significant appreciation pressures on their currencies. There is an important point to note here, though. If the bulk of foreign currency inflows is channelled directly to central banks or stabilisation funds and re-invested abroad, then appreciation pressures could be mild. De-pegging GCC currencies will not likely have a negative impact on the USD. Since GCC countries do not have enough investment opportunities domestically to absorb petrodollars, they will continue to find their ways into US Treasuries even after a revaluation. In addition, unlike the case of China, currency revaluation in the GCC will not imply a decline in exports and a decline in accumulation of reserves, since crude oil exports are denominated in USD and are not sensitive to exchange rate movement. In fact, an appreciation of the GCC currencies could help resolve global imbalances by making US imports cheaper and reducing the deficit. A shift in the demand for the USD by reallocating reserves, however, could indeed de-stabilise it. An outright exit from the USD by global central banks could indeed lead to its collapse. The cost of [the resulting] abrupt shock to interest rates in the US could be large. It could indeed lead to a global slowdown. I think that most GCC countries will opt towards a gradual shift in reserves.” — Hany Genena, Senior Economist, EFG-Hermes
“De-pegging does make sense [for the GCCs], to run their own monetary policy. The inflationary situation at the moment throws that into very sharp relief. A lot of preparation would need to be done, including stopping pricing oil in dollars. Otherwise it risks compounding the volatility of the local currency value of oil revenues. The authorities would also have to guard very carefully against the kind of substantial appreciation pressures that there would undoubtedly be at the moment if the currency were floating.” — Simon Williams, Economist Intelligence Unit
“The key here is for the region to do what is best for the long-term sustainability of the region’s economic performance. We believe that authorities still have time to diversify reserves quietly before the new single currency comes into effect. Forex reserves in fact are not the issue. The bigger issue is the investment agencies who are clearly large even in a global context. They would likely be discreet in their diversification efforts. However, the impact on the value of the dollar would be there for all to see. [The interest-rate, exchange-rate trade-off] is a real challenge for the region, especially when taking into account the need to diversify the economies in order to create jobs for the hugely-expanding labour markets. In the short-term, this may create a conflict between managing the boom (higher interest rates) and help boost the diversification process (by ensuring a competitive currency). Clearly, the situation would need careful monitoring and managing. On the issue of what currency to price oil in, we see no reason why an alternative currency/ies could not be used. If the GCC countries were to pursue a trade-weighted exchange rate target, then imagine the UAE, for instance, exporting to Europe. This would mean the importer would need to hedge its euro/dollar exposure and the UAE exporter would have to hedge its dollar/GCC exposure. Why not transact in either the GCC single currency or euro, which removes the need for one counterparty to hedge? If [oil pricing] were in euro, the UAE would be able to naturally diversify its reserves away from a structurally weak dollar. Alternatively, it could price oil in dirham, and then make a rational investment decision as to what to do with that money.” — Steve Brice, Standard Chartered Bank
“We do not make recommendations, but I am not entirely sure whether a change of policy would help fix the problem. I don’t really see an alternative regime that would be superior. If you have a flexible exchange rate, and it rises with capital inflows which create higher credit and inflation, then interest rates are raised, then the exchange rate rises again ? [It is a vicious circle.] Practically, it may be better to endure the peg. It is the price paid for a less-than-perfect policy regime [like any]. Any country with high commodity dependence has this issue. In the case of Norway or Canada, the ratio is lower than here. The UAE [and GCC] are a special case, with a huge exchange-rate ‘overshoot’ and ‘undershoot’ possibility. In any case, it is unwise to shift from a fixed system to flexible without the rest of the policy framework and banking system being ready. Change could mean GDP would become even more volatile.” Pierre Cailleteau, Sovereign Risk Unit, Moody’s