Iraq is planning painful cuts in social benefits relied on by millions of government workers. Saudi Arabia will likely have to delay mega-projects. Egypt and Lebanon face a blow as their workers in the Gulf send back less of the much-needed dollars that help keep their fragile economies afloat.
The historic crash in oil prices in the wake of the coronavirus pandemic is reverberating across the Middle East as crude-dependent countries scramble to offset losses from a key source of state revenue — and all this at a time when several of them already face explosive social unrest.
The economies of all the Arab Gulf oil exporters are expected to contract this year, as much as 5% in Iraq, according to the International Monetary Fund.
While some Gulf countries can rely on a cushion of foreign currency reserves, nowhere in the region are the circumstances more dire than in Iraq, where oil sales fund 90% of the state budget.
Iraq saw massive protests in the past months by a populace angry over the weak economy and rampant corruption — and the turmoil could erupt again. Cutbacks in spending will only add to the pain for a population struggling to get by under coronavirus restrictions. In the capital's Tahrir Square, protesters are still camped out, determined not to let their movement die.
"Coming into summer the conditions are developing for a perfect storm for the government," said Sajad Jiyad, an Iraq-based analyst.
Oil is currently trading at $20 per barrel, dipping even lower some days to levels not seen since 2001. Further constraints will be felt as an OPEC agreement to cut production levels by 23% to stabilize the oil market takes hold. May and June are expected to be particularly difficult as that is when oil storage space will be full, making it harder for countries to market oil, according to Robin Mills, CEO of Dubai-based Qamar Energy.
So far it's early, and no one has reached a stage where the budget runs out, Mills said. "But that is inevitable — Iraq will probably hit first."
In its draft 2020 budget, Iraq had been counting on revenues from oil prices at $56 a barrel to fund badly needed development projects and the bloated public sector, costing nearly $45 billion in compensation and pensions. Oil Minister Thamir Ghadhban said recently that revenue from crude exports has dropped by 50%.
Now officials are debating difficult salary cuts. One proposed idea would defer paying public sector workers part of their social benefits until the financial sector improves, according to three Iraqi officials. The question is how much to cut and from whom; one recommendation is that higher-end earners take a 50% cut. The officials spoke on condition of anonymity so as not to derail ongoing talks.
That would save Iraq hundreds of millions of dollars, but risks triggering unrest. Public sector workers receive a host of benefits that effectively add 50-70% to their take-home wages. They include family allowances and so-called danger pay benefits for security forces.
Still, experts said that won't be enough if oil prices remain between $20-30 per barrel.
"Cuts need to be deeper to make a dent in payroll, and even then, if revenues are so low there comes a point where cuts are not enough," Jiyad said .
On top of this, expected compliance with OPEC will require Iraq to cut over 1 million barrels per day from production in May and June.
Moreover, the country has been left without an effective executive to carry out reforms by an ongoing leadership vacuum since December, when Prime Minister Adel Abdul-Mahdi resigned under pressure from protesters. Prime Minister-designate Mustafa Kadhimi is due to present his proposed Cabinet to Parliament next week, but he faces opposition from key political blocs.
Until his government is in place, a 2020 budget is unlikely to be approved. This limits Iraq's ability to borrow from international agencies for budgetary support.
Across the region, the drop in oil prices will derail future investment and development plans.
The region's largest crude producer, Saudi Arabia, plans to cuts spending by 5%, or about $13.3 billion. Additional cuts and measures are expected as it digs into its roughly $500 billion in foreign reserves.
Target dates of Crown Prince Mohammed bin Salman's plan for the completion of new cities and mega projects will likely be delayed as businesses suffer and foreign investment dips amid the pandemic.
Kuwait has ample reserves as well. But the island nation of Bahrain faces a debt estimated to be equal to 105% of its GDP, even after it received a $10 billion bailout from its neighbors to avoid defaulting on a $750 million Islamic bond repayment in 2018.
Other giant global oil producers will have to grapple with job losses and economic shocks.
U.S. producers and service companies have laid off thousands of employees, and greater job losses are expected as the pandemic drags on. Many shale producers were already struggling before the pandemic hit, and some have filed for bankruptcy, with more expected.
The price crash has dealt a blow to Russia at a time of partial economic shutdown. Russian officials say that the nation's solid hard currency reserves can help sustain the shock and insist low production costs allow Russian oil companies to stay profitable.
The double shock of the pandemic and dropping oil prices is also expected to hit hard in Egypt, Jordan and Lebanon, which rely on a large diaspora and workers in oil-rich Arab Gulf countries who send foreign currency home.
In Lebanon, remittances once made up 12.5% of GDP; in Egypt, they account for 10% of GDP. Coupled with its own economic crisis and financial turmoil, the anticipated losses for Lebanon will be devastating.
"How are we expected to survive from now on? Hunger is knocking at the doors," a Lebanese man told reporters this week, as he waited in a long line outside a money transfer shop in Beirut, on the last day he would be allowed to collect a wire transfer in dollars from his older brother in Qatar.
Asian stock markets gained Monday after Japan's central bank promised more asset purchases to shore up financial markets and more governments prepared to revive struggling economies by reopening businesses.
Tokyo's benchmark surged 2.8% and Shanghai, Hong Kong and Sydney also gained.
Investors are looking ahead to meetings of U.S. and European central bankers this week for additional measures to reverse the deepest global slump since the 1930s. That comes amid mounting evidence the coronavirus pandemic's economic damage is even worse than expected.
The Bank of Japan said it will buy an additional 15 trillion yen ($140 billion) of commercial paper and bank loans. That is a "significant increase from the timid 2 trillion yen" in purchases announced in March, said Marcel Thieliant of Capital Economics in a report. The bank also raised its ceiling on purchases of government debt.
Elsewhere, the U.S. Federal Reserve is more likely to announce it will wait to see the impact of earlier stimulus before taking more action, Hayaki Narita of Mizuho Bank said in a report. The European Central Bank "will likely keep its options for easing open."
Also Monday, China's government reported profits at major industrial companies shrank 34.9% in March over a year earlier. That was an improvement over the 38.3% decline in January and February, but analysts said a full recovery is a long way off.
This week's other potentially market-moving events include data from the United States, China, Japan, Germany and France on inflation, trade, industrial activity and retail spending.
The Shanghai Composite Index gained 0.7% to 2,827.50 while the Nikkei 225 in Tokyo rose to 19,803.99. The Hang Seng in Hong Kong added 1.8% to 24,270.61.
In Seoul, the Kospi was 2.1% higher at 1,928.23. Sydney's S&P-ASX 200 gained 0.7% to 5,278.30 and India's Sensex opened up 2% at 31,970.09. Singapore advanced 1.3% and Bangkok was up 0.6%.
Investors appear to be looking past the outbreak to figure out which companies can survive and prosper after conditions improve.
China, where the pandemic began in December, has reopened factories and other businesses after numbers of new cases declined.
Spain plans to start easing restrictions Sunday and Italy on May 4. France will announce its plans next month.
President Donald Trump, campaigning for re-election, is pressing state governors to ease anti-disease controls as early as possible.
Some governors are lifting shutdown orders despite warnings that could cause a surge in infections. Others including Gov. Andrew Cuomo of New York say they want a bigger decline in new cases before rolling back curbs.
"The hope that peak virus is upon us has lifted financial markets modestly in Asia," said Jeffrey Halley of Oanda in a report. "The hopes that even a partial return to regular economic activity begins, to draw a line under the economic carnage wrought by the pandemic, should see markets such as equities outperform this week."
Wall Street ended last week higher after Trump signed legislation to provide an additional $500 billion in virus aid, including loans to small businesses.
U.S. government data showed an unexpectedly sharp 14.4% drop in durable goods orders.
That added to grim numbers that are denting investor sentiment, which economists have warned is far too optimistic.
The S&P 500 Index gained 1.4% to 2,836.74. The U.S. benchmark is down 16.2% from its February record. The Dow Jones Industrial Average rose 1.1% to 23,775.25. The Nasdaq composite added 1.7% to 8,634.52.
"Investors have written off 2020 as a shocker and are looking more intently into the landscape in 2021," Chris Weston of Pepperstone said in a report.
They are due to get more indicators how that future might develop when companies including Exxon, Amazon, Microsoft, Boeing and McDonald's start reporting quarterly results this week.
In energy markets, benchmark U.S. crude for June delivery lost $1.76 cents to $15.20 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 2.7% on Friday to settle at $16.94. Brent crude, used to price international oils, declined 88 cents to $23.93 per barrel in London. It added 0.5% the previous session to $21.44 per barrel.
The dollar declined to 107.27 yen from Friday's 107.49 yen. The euro gained to $1.0847 from $1.0823.
In a manic week full of previously unthinkable market moves, Wall Street ended Friday with one reminiscent of what things were like before the coronavirus outbreak upended everything.
The S&P 500 glided to a gain of 1.4%, with Apple, Microsoft and other technology stocks leading the way, as they did so many times before the economy shut down in hopes of slowing the spread of the outbreak. The bond market was quiet, while crude prices climbed again.
The gains offered a soothing coda for a wild week, which began with Monday's astonishing plummet for oil and carried through Thursday's sudden disappearance of a morning stock rally, as markets pinballed from fear to hope and back again.
"The market sort of feels like Dorothy coming to the crossroads and has yet to meet the scarecrow to tell her which way to go," said Sam Stovall, chief investment strategist at CFRA.
The S&P 500 still lost 1.3% for the week as worries about the economic damage dealt by the coronavirus outbreak outweighed hopes that businesses could soon reopen. That snapped the first two-week winning streak for the S&P 500 since it began selling off in February.
Reports piled higher through the week showing the pandemic is bludgeoning the economy even more than economists had feared. Roughly one in six U.S. workers has filed for unemployment benefits over the last five weeks.
The damage is so severe that a heavily divided Congress has reached bipartisan agreement on massive support for the economy. President Donald Trump signed a bill Friday to provide nearly $500 billion more, including loans for small businesses and aid for hospitals.
The big question for markets is when the economy can reopen, said Mike Zigmont, head of trading and research at Harvest Volatility Management. Businesses can get by for a few months on government help, he said, but if the shutdown drags on longer they could be permanently damaged.
Many investors have essentially agreed to swallow horrific corporate profits and economic data in upcoming months, and they're turning their focus to who can survive and eventually grow their profits in the future.
Next week will be one of the busiest of this earnings season, with more than 150 companies in the S&P 500 reporting how much they made during the first three months of the year. Many companies have been pulling their profit forecasts entirely for 2020 given all the uncertainty, and Wall Street is slashing its own estimates.
"I don't really think that's added to the concern of investors because they assume that companies will be doing a lot of writing down in this bad year so that 2021 could look even better," said CFRA's Stovall.
The S&P 500 added 38.94 points to 2,836.74. The Dow Jones Industrial Average rose 260.01, or 1.1%, to 23,775.25, and the Nasdaq composite added 139.77, or 1.7%, to 8,634.52.
Gains for big tech stocks led the way. Tech makes up an outsized portion of the S&P 500 following years of market dominance. And because changes in market value dictate the index's moves, the performance of the biggest stocks can have a disproportionate effect.
Stocks have been generally rallying since late March on promises for massive aid from Congress and the Federal Reserve, along with more recent hopes that parts of the economy may be close to reopening. In Georgia, some businesses began welcoming back customers on Friday after the governor eased a monthlong shutdown.
But many professional investors have been skeptical of the market's recent rally. They say there's still too much uncertainty about how long the recession will last and that attempts to reopen the economy could trigger more waves of infections if they're premature.
In a demonstration of how hungry the market is for a vaccine or treatment for COVID-19, the S&P 500 erased a rally of more than 1% in a span of seconds on Thursday following a discouraging report about a potential drug treatment. The Financial Times said a Chinese study of the drug found no positive effect, citing data published accidentally by the World Health Organization, though the company behind the drug said the data represented "inappropriate characterizations" of the study.
Through all the volatility, many investors saving for retirement have been holding steady. They're calling in for advice much more often, but the majority of savers with 401(k) accounts at Fidelity did not pull back on their contributions during the quarter.
The S&P 500 is down 16.2% from its record in February, though it's more than halved its loss since late March.
The price of a barrel of U.S. oil to be delivered in June rose 2.7% to settle at $16.94. It had sunk as low as $6.50 earlier this week on worries that storage tanks are close to topping out amid a collapse in demand. Worries about extra oil with nowhere to go sent prices in one corner of the U.S. oil market below zero on Monday.
Brent crude, the international standard, rose 0.5% to $21.44 per barrel.
The yield on the 10-year Treasury note slipped to 0.60% from 0.61% late Thursday. Yields tend to fall when investors are downgrading their expectations for the economy and inflation.
European and Asian stock markets fell.
Japanese automaker Mitsubishi Motors Corp. said Friday it expects 26 billion yen ($240 million) in losses for the fiscal year through next March, as sales plunge because of the coronavirus pandemic.
Tokyo-based Mitsubishi, allied with Nissan Motor Co., announced the revision to its earnings projection. The maker of the Pajero sports utility vehicle earlier forecast a profit of 5 billion yen ($46 million).
It revised its sales projection to 2.27 trillion yen ($21 billion), down from 2.45 trillion yen ($23 billion).
Demand for autos has plunged because of the outbreak at a far greater pace than the automaker had expected, despite cost-cutting efforts, it said in a statement.
Mitsubishi's dismal projection could foreshadow similar news from automakers around the world. Production at auto plants has been halted or scaled back and sales have sputtered.
The auto industry is the pillar of Japan's economy and the fallout is expected to be great, with the world's third largest economy possibly headed to a recession.
Mitsubishi Motors' three-way alliance with Nissan and Renault SA of France was forged by Carlos Ghosn, who led it until his arrest over financial misconduct allegations in Tokyo in 2018. While awaiting trial, Ghosn skipped bail and fled to Lebanon late last year.
U.S. oil prices crashed to the negative territory for the first time in history on Monday, fueled by pandemic-related demand shock and oversupply fears.
The West Texas Intermediate (WTI) for May delivery shed 55.9 U.S. dollars, or over 305 percent, to settle at -37.63 dollars a barrel on the New York Mercantile Exchange, implying that producers would pay buyers to take oil off their hands.
It marks the first time an oil futures contract has traded negative in history, according to Dow Jones Market Data. The May contract expires on Tuesday.
The June WTI contract fell more than 18 percent to 20.43 per barrel. The global benchmark Brent crude for June delivery decreased 2.51 dollars to close at 25.57 dollars a barrel on the London ICE Futures Exchange.
Traders scrambled to unload positions ahead of the contract's expiration, contributing to the historic drop, experts noted.
"We attribute the WTI price weakness to the imminent expiry of the May contract tomorrow and the low trading volume that comes with it," Giovanni Staunovo, a commodity analyst at UBS Global Wealth Management, told Xinhua on Monday.
Weaker demand tied to the COVID-19 pandemic and a potential supply glut is a more severe problem, according to analysts.
"The decline in more liquid futures contracts reflects the broader problem we have in the oil market -- severe oversupply in 2Q," said Staunovo.
Global oil demand is expected to fall by a record 9.3 million barrels a day (b/d) year-on-year in 2020, the International Energy Agency (IEA) warned in its newly-released monthly report.
"The impact of containment measures in 187 countries and territories has been to bring mobility almost to a halt," the IEA said, adding demand in April is estimated to be 29 million b/d lower than a year ago, down to a level last seen in 1995.