NEW YORK (Bloomberg) -- The oil crash came and went but the debt pile it left across the Gulf is still growing, leaving the region’s energy-dependent economies more vulnerable next time a crisis strikes.

All but debt-free before crude prices nosedived in 2014, many Gulf governments tried to borrow their way through while making only cautious and halting efforts to cut spending and diversify their economies. Meanwhile, a Saudi-led blockade of Qatar has split the six-state Gulf Cooperation Council and complex regional dynamics mean it’s no longer a foregone conclusion that the strong will bail out the weak with no strings attached.

If oil prices crash again, the pain could be greater than five years ago, raising the risk of a regional recession because governments would have to slash spending while markets would be more reluctant to lend, according to Bloomberg economist Ziad Daoud.

“Gulf economies are more vulnerable to a collapse in oil prices today than during the last rout in 2014,” Daoud said. “Debt is higher, foreign exchange reserves are lower and the chance of pooling resources is smaller. A sharp drop in oil prices could prove more damaging this time around.”

Moment of truth

The worst oil crash in a generation was a moment of truth for energy juggernauts around the Gulf, which include the world’s biggest exporters of crude and liquefied natural gas.

After splashing petro-wealth on generous state handouts during more than a decade of surging oil prices, Gulf governments, suddenly cash-strapped, spent the past few years carefully trimming benefits to citizens and cutting subsidies while trying to avoid a popular backlash.

Saudi Arabia and the United Arab Emirates have imposed excise and value-added taxes for the first time. But the prospect of slimming bloated wage bills is fraught with political peril, and they remain the biggest-ticket item on Gulf budgets.

While Oman and Bahrain stand out, the experience of the bloc’s two smallest economies might be less an exception than a warning for what could lie ahead if governments don’t diversify -- and fast.

In 2018, the GCC accounted for nearly a quarter of emerging-market bonds sold in dollars and euros, up from less than 2% a decade ago, according to data compiled by Bloomberg. As a whole, Gulf economies have almost tripled the ratio of debt to gross domestic product since 2014.

“It will become dangerous for market participants if the debt spiral gets out of control, especially coupled with a collapse in oil prices” and local risks such as questions of political succession, said Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt. “Economic diversification is poor, and it will take lots of time to tackle it.”

Most vulnerable

The picture is uneven across the bloc, with Qatar and Kuwait protected by large financial buffers. The U.A.E. is also strong. But in Oman and Bahrain, which were slow to implement fiscal reforms despite dwindling energy reserves, the future looks more uncertain.

Bloomberg Economics found that Oman and Bahrain “already have unsustainable debt dynamics,” while the outlook is mixed for Saudi Arabia. The kingdom could reach its self-imposed debt ceiling of 30% of GDP by 2020 if large budget deficits persist and it doesn’t tap into reserves, down a third since mid-2014.

Oman’s budget deficit is among the largest of all sovereigns tracked by Fitch Ratings, which downgraded its debt to junk in December. Concerns over Oman’s dwindling buffers have also sparked a debate over whether it’ll need a bailout like that Bahrain got last year.

“The critical issue is the success in diversifying the economies from the debt-funded spending,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Without that, economic fundamentals will weaken with the higher leverage.”

Though it’s rated lower than Oman, tiny Bahrain’s bonds tend to trade higher because markets believe it always be supported by Saudi Arabia, with which it enjoys close political ties. Despite those alliances, Bahrain only got Gulf help once international investors began closing their doors and then only with a promise to reform. Oman is more neutral in its political stance, and therefore seen as more exposed to headwinds unless it makes painful changes.

“Increasing debt levels are obviously a concern, if there is no purpose behind the strategy and economic growth fails to take off,” said Anders Faergemann, a fund manager at PineBridge Investments in London which oversees $90 billion in assets. “In the case of the Gulf countries, which are heavily reliant on one source of income, it is important for the future to diversify their growth and income.”