Saudi Arabia’s decision to increase production and sell oil at sharply discounted prices at a time of declining oil demand has sent shock waves through oil markets and stock markets. Increased production comes at a moment when the covid-19 outbreak has seized business and tourism activity globally — essentially creating a simultaneous demand and supply shock.

There will probably be severe economic effects on both sides of the Persian Gulf, as well as in Pakistan and countries in the Middle East and Horn of Africa that rely on the Gulf Arab states for financial support. Other Middle East oil producers will be forced to sell their crude at the Saudi price, posing a heavy blow to fiscal plans. Here’s how this may play out across the region.

2020 was already looking like a difficult year

Few producers will be able to bear the pain until either Russia agrees to production cuts — which looks unlikely for now — or a political crisis threatens the availability of oil transferring through the Strait of Hormuz or Bab al-Mandeb, bumping up oil prices. Neither is a longer-term solution to get back to steady, if low, growth.

For Iraq, without a new government in place, the timing is terrible. For Iran, there appears to be no bottom to the list of problems. Iran’s capacity for oil production and export is crippled by sanctions, and basic governance is halted by internal turmoil related to covid-19.

With oil prices forecast by the Energy Information Administration in February to stay in the $60-per-barrel range, 2020 was already a difficult year across the gulf. Depending on the country, fiscal break-even prices ranged from $40 a barrel to over $100 a barrel. Many oil exporters faced low growth projections around 1 percent of gross domestic product, just hovering above recession levels. The Saudi government’s own budget forecast a fiscal deficit at 6.5 percent of GDP for 2020, to be filled with reserves, loans or bond issues.

Gulf nations spend more than they earn

S&P Global has estimated that the Gulf Cooperation Council states will need as much as $300 billion in external funding to meet 2018-2022 spending needs. New funding needs may dwarf those estimates, should the price war drag out through the year. Access to debt capital markets has been good for the six members of the GCC — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman – even those with less than perfect credit ratings such as Oman and Bahrain. The issue is not the ability to borrow but the ability to repay, given other demands on government budgets.

The simple math is that Saudi Arabia and all of its GCC neighbors tend to spend more than they earn in oil and gas revenues. Fiscal break-even prices for oil vary throughout the GCC, with Bahrain (forecast at $96 a barrel) at one extreme and Qatar (forecast at just over $60 a barrel) at the other. But with oil now trading in the range of just $30 a barrel and expected to go even lower, no GCC government will have a cushion. What are the options? Seek external finance, draw down reserves or drastically cut spending.

Over the past four years, the GCC nations have tried to become less energy-dependent, including the imposition of a 5 percent value-added tax in Bahrain, Saudi Arabia and the UAE, along with efforts to curtail energy and water subsidies. But my research suggests that these governments now have few levers to reduce spending and find alternative sources of revenue. The measures that have already been tried — implementing more taxes and fees and further reducing spending on social benefits and public sector wages — could lead to social unrest and undoubtedly increased state repression and would certainly dampen any prospects for private-sector growth.

What does this mean for MENA private-sector growth?

The weaker GCC states have relied on their wealthier neighbors for support in the recent past. Saudi Arabia may now be less in a position to help Bahrain, as in 2011 and 2019. Oman is in the midst of a leadership transition, with a mounting debt repayment cycle and a reliance on China as its main oil export destination. Inside the GCC, equity markets have panicked, wiping out investment gains made by gulf citizens, including those who invested in the Saudi Aramco initial public offering in late 2019.

For fledgling private-sector growth, the continued ability of state-owned national oil and gas entities to determine wild swings in the local economy continues to be a threat, given the cyclical nature of GCC economies — government spending increases when oil prices are high and generally contracts when oil prices are low. What will this mean in 2020? Expect GCC government contracting to dry up and many foreigners to be made redundant, along with delays in government payments.

Reconstruction aid may be tough to find

Outside the Gulf, governments that depend on GCC-member foreign aid and direct financial support will face a difficult year. Conflict zones in need of aid and reconstruction support — especially Yemen and Syria — may see new threats to sources of support already under political strain, as early UAE reconstruction efforts in Syria have been met with U.S. disapproval.

For Lebanon, which Saudi Arabia has not committed to support, the timing is particularly bad. A regional economic downturn will lessen any hopes for a strong tourism resurgence, increased private investment and a bank-sector bailout. For Pakistan, which is currently dependent on Saudi Arabia and the UAE as key investors in its energy sector (along with China), there are few ready replacements should those investments be delayed or canceled. In the Horn of Africa, a quick retreat of the GCC states as political and economic investors could be very disruptive.

The MENA region has always seen cycles of oil windfalls and dry periods. In spite of this volatility and the various regional conflicts since 2011, there have been green shoots of growth — the World Bank projected at least positive regional growth in 2020, for instance.

That cautious optimism may prove premature. Right now, the Saudi oil supply shock is a gamble to that hard-won growth, already threatened by a global outbreak few seem to know how to control.

Karen E. Young is a Resident Scholar at the American Enterprise Institute. She tweets @ProfessorKaren