Gulf states ‘face their biggest economic challenge in history’
SIZEABLE FOREIGN ASSETS WILL CUSHION IMPACT FOR THE REGION, SAYS IIF
Shocked by Covid-19 and the plunge in oil prices, the six GCC states will experience their biggest economic challenge in history in 2020, according to the Institute of International Finance (IIF).
“Restrictive containment measures and fear of contagion has weakened consumer confidence and demand. The depth of the contraction for this year and the speed of the expected recovery in 2021 is subject to a high degree of uncertainty,” said Garbis Iradian, chief economist, Middle East and North Africa, at the IIF.
Recovery in 2021
There are reports of partial containment of the pandemic in the region, and the latest Purchasing Managers’ Indexes (PMIs) for the UAE, Saudi Arabia and Egypt indicate that, as these economies relax Covid19-related lockdowns, business is picking up. However, analysts said economies will remain in contraction this year.
“We expect overall real GDP to contract by 4.4 per cent in 2020. Oil GDP is projected to contract by 5.3 per cent due to the Opec+ production-cut agreement. The non-oil GDP could contract by 3.8 per cent due to virus-containment measures, the plunge in oil prices, and lower public spending,” said Iradian.
While the service sector activity will be hit the hardest due to containment efforts and social distancing, private and public investments will be delayed. Growth could resume in 2021 supported by the partial easing in oil production cuts and gradual pickup in private sector non-oil activity.
GCC authorities have resumed fiscal adjustments despite the recession. A wide range of measures, such as cuts in public spending, slashing salaries of government employees and tripling of value added tax in Saudi Arabia, postponing of
VAT in Kuwait and Qatar have been announced. The belt tightening across GCC is expected to offset part of the revenue losses from oil production cuts.
The IIF expects the aggregate fiscal deficit of the GCC to widen from 2.5 per cent in 2019 to 10.3 per cent of GDP in 2020, equivalent to $144 billion, assuming an average Brent oil price of $40 per barrel.
“We project a decline in hydrocarbon revenue from $326 billion in 2019 to $200 billion in 2020. Saudi Arabia, Kuwait, Qatar, and the UAE, with large public foreign assets, are better placed to accommodate large deficits,” said Iradian.
While the service sector activity will be hit the hardest, due to containment efforts and social distancing, private and public investments will be delayed.