Eastern and Gulf Cooperation Council (GCC) economies are heading toward a
recession in 2020 as a result of the Covid-19 pandemic, collapsing oil prices,
and the unfolding global financial crisis.
fast-spreading global pandemic – with Europe its new epicentre – is generating
both supply and demand shocks. The supply shock results from output cuts,
factory closures, disruptions to supply chains, trade, and transport, and
higher prices for material supplies, along with a tightening of credit. And the
aggregate-demand shock stems from lower consumer spending – owing to
quarantines, “social distancing,” and the reduction in incomes caused by workplace
disruptions and closures – and delayed investment spending.
largest Arab economies, Saudi Arabia and the United Arab Emirates, are
proactively fighting the spread of Covid-19, for example by closing schools and
universities and postponing large events such as the Art Dubai fair and the
Dubai World Cup horse race. Likewise, Bahrain has postponed its Formula One
Arabia has even announced a temporary ban on non-compulsory umrah pilgrimages
to Mecca, and has closed mosques. Because religious tourism is one of the
Kingdom’s main sources of non-oil revenue, the umrah ban and severe
restrictions on the hajj pilgrimage will have a large negative impact on
policymakers across the GCC are rolling out stimulus measures to support
businesses and the economy. Central banks have focused on assisting small and
medium-size enterprises by deferring loan repayments, extending concessional
loans, and reducing point-of-sale and e-commerce fees.
authorities have unveiled stimulus packages to support companies in the
hard-hit tourism, retail, and trade sectors.
The UAE has
a consolidated package valued at US$34.3 billion, while Saudi Arabia’s is worth
US$32 billion and Qatar’s totals US$23.3 billion. Moreover, policymakers are
supporting money markets: Bahrain, for example, recently slashed its overnight
lending rate from 4% to 2.45%.
camel in the room remains oil, especially the immediate impact on demand of the
Chinese and global economic slowdown.
International Energy Agency optimistically estimates that global oil demand
will fall to 99.9 million barrels per day (bpd) in 2020, about 90,000 bpd lower
than in 2019 (in the IEA’s pessimistic scenario, demand could plunge by 730,000
successive production cuts had already led to OPEC’s global market share
falling from 40% in 2014 to about 34% in January 2020, to the benefit of US
weakening outlook for oil demand has been exacerbated by the Saudi
Arabia-Russia oil-price war, with the Saudis not only deciding to ramp up
production, but also announcing discounts of up to US$8 per barrel for
Northwest Europe and other large consumers of Russian oil.
the Kingdom’s strategic aim is to weaken shale-oil producers and regain market
share, the price war will also hit weaker oil-dependent economies (such as
Algeria, Angola, Bahrain, Iraq, Nigeria, and Oman), and put other major oil
producers and companies under severe pressure.
the two years after oil prices’ last sharp fall, in 2014, OPEC member states
lost a collective US$450 billion in revenues.
episode prompted GCC governments to pursue fiscal consolidation by phasing out
fuel subsidies, implementing a 5% value-added tax (in the UAE, Saudi Arabia,
and Bahrain), and rationalising public spending.
GCC countries continue to rely on oil for government revenues, and their
average fiscal break-even price of US$64 per barrel is more than double the
current Brent oil price of about US$30 per barrel.
The UAE and
Saudi Arabia have estimated break-even prices of US$70 and US$83.60,
respectively, while Oman (US$88), Bahrain (US$92), and Iran (US$195) are even
more vulnerable in this regard. More diversified Russia, by contrast, can
balance its budget with oil at US$42 per barrel.
near-halving of oil prices since the start of 2020, the sharp fall in global
growth, and the effects of the Covid-19 pandemic will put severe strains on
both oil and non-oil revenue.
result, GCC governments’ budget deficits are likely to soar to 10-12% of GDP in
2020, more than double earlier forecasts, while lower oil prices will also
result in substantial current-account deficits.
will respond by cutting (mostly capital) spending, magnifying the negative
effect on the non-oil sector.
countries (Kuwait, Qatar, and the UAE) can tap fiscal and international
reserves, while others (Oman, Bahrain, and Saudi Arabia) will have to turn to
international financial markets.
GCC governments be able to borrow their way out of this phase of lower oil
equity and debt markets currently are close to meltdown; with investors fleeing
to safe government bonds, liquidity is drying up.
countries will suffer a negative wealth effect, owing to losses on their
sovereign wealth funds’ portfolios and net foreign assets.
bulging deficits and the prospect of continued low oil prices, sovereign and
corporate borrowers will find it harder and more expensive to access markets.
financial crisis will therefore exacerbate the effects of the oil-price shock
and the pandemic.
pandemic itself is still unfolding, and its eventual global impact will depend
on its geographical spread, duration, and intensity.
But it is
already clear that in the coming weeks, there will be heightened uncertainty
about global growth prospects, oil prices, and financial-market volatility.
And as the
pandemic continues its deadly march, the GCC economies – like many others –
will be unable to avoid recession.
Saidi is former chief economist of the Dubai International Financial Center,
and was a vice-governor of the Bank of Lebanon as well as Lebanon’s minister of
economy and industry. © Project Syndicate 2020.
Headline: The Arab world’s perfect Covid-19 storm
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