If the US goes over the fiscal cliff later this year, the impact on the Gulf states will be profound
“Frankly, I don’t like either of them.” That was the opinion of one American I spoke to on a trip I made to the US a couple of weeks ago. Has there ever been a more polarised vote? I don’t think so. Discussion over the election was rampant - in back yards, over the dinner table and in bars. It has divided families and filled internet talkboards with vitriol, all played out to the relentless drumbeat of attack ads and Fox News bleating away in the background.
And yet, at the end of it all, despite the histrionics and the fanfare, and despite Donald Trump’s tweets and Karl Rove’s hubris, we are back with the status quo. Same president, same Democrat majority in the Senate and same Republican majority in the House.
So what does all this mean for the Middle East? First and foremost, if we look at the coming months, are the negotiations that need to take place over the so-called fiscal cliff. In the US right now, the partisan nature of cross-party politics is such that even uttering the word compromise is seen as a sign of weakness. The phrase currently being bandied around the corridors of power in Washington is “common ground”.
Yet, with the US haemorrhaging roughly $100bn every month due to its deficit, if you thought this was purely a domestic matter for the world’s only superpower, then think again. Last week, I spoke with William Cohen, a former Republican senator who crossed party lines to become Bill Clinton’s secretary of defence during the latter’s second term. “If we go off the fiscal cliff, it impacts the Gulf, it impacts China, it impacts the world — because of the integration of the various economies, we’re globalised,” Cohen told me. “And therefore what happens in the United States will have a major impact elsewhere. The price of oil, if that goes down, what does that do for revenues for the region?”
Cohen’s words were prescient. Barack Obama may not have had much of a honeymoon period in 2008, but he barely had time to loosen his tie after his victory speech last week before the markets delivered their verdict. In line with a dip in equities, both Brent and WTI dropped by roughly $3.50 (around 4 percent) as investors immediately switched their attention to the looming fiscal cliff.
Given that we still have just under two months to go until a decision on the $600bn worth of tax increases and spending cuts needs to be made, expect a rocky period for global markets.
Whether or not the oil price will continue to drop is, of course, anyone’s guess. If Romney had won, it’s entirely possible that it would have dropped even further.
But what is clear is that concerns over the oil price come only a week or so after the International Monetary Fund (IMF) has warned the Gulf economies to reduce government spending to prevent their budgets from falling into deficit within the next five years or so.
In that note, the IMF noted that the outlook for the oil — a bedrock, of course, of all the Gulf countries’ budgets — was “extremely uncertain”. The success or failure of the discussions that will take place over the next two months or so is not a short-term problem; the effects on the global economy could be disastrous.
The last word on this should probably go to Lloyd Blankfein, the CEO of investment banking colossus Goldman Sachs. In an interview with CNBC, he gave a pretty good indication of just how worried many investors are.
“The fiscal cliff specifically is one of the major ways in which the slow recovery that we have could be completely derailed,” he said. “Hard landing in China. Euro collapsing. Problems in the Middle East. And fiscal cliff is probably paramount in that area. We just met with a dozen of the largest high-tech company CEOs in the country. Not only are they hoarding cash — all their customers, all their suppliers are. They’re scared to death we’re going to go over this cliff and it could be a catastrophe.”
Ed Attwood is Editor of Arabian Business