GCC economy’s resilience to be challenged

GCC countries are facing severe headwinds on multiple fronts that will have a negative impact on oil gross domestic product (GDP), which is likely to contract this year due to a decline in crude prices and the impact of coronavirus, analysts said.

“We now largely expect to see a contraction in real oil GDP of Gulf countries in 2020, which only takes into account production changes. we largely see a more contained contraction in the oil sector this year compared to 2019 [including Saudi Arabia], with the UAE being the main exception,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

GCC nations’ fiscal positions are expected to weaken in 2020 with a lower oil revenue outlook.

If Opec+ fails to reach a consensus in the near future, a further decline in oil prices cannot be ruled out.

Importantly, oil demand will also remain subdued due to a slowdown in the global economy due to COVID-19.

“We forecast the GCC’s weighted-average fiscal deficit to widen to around 4.7 percent of GDP in 2020 from 2.1 percent in 2019, though this is still below the 8.2 percent peak reached in 2016,” Malik had said in a note released last month.

“We already made some downward revisions to GCC economic forecasts – oil and non-oil – in February, albeit before the sharp increase of global cases of COVID-19. We see further downside risks to our economic forecast, though we await more clarity on COVID-19 developments internationally and regionally. There are increasing signs of economic disruptions in the region, including temporary travel bans, the reduction or suspension of airline routes, school closures, cancellations of events, and some instances of corporates asking for staff to take unpaid leave,” Malik said.

Jason Tuvey, the senior emerging markets economist at Capital Economics, lowered its 2020 GDP growth forecasts for the Mena region by 0.5 percent to 2.0 percent due to COVID-19 and the risks remain skewed to the downside.

Tuvey expects a recovery in crude over the remainder of 2020, but prices are still likely to be lower on average this year than last. “The Gulf’s annual oil export revenues will be around $40 billion [2 percent of GDP], smaller than in 2019 due to lower oil prices and production,” he said.

Oil prices would need to fall below $50 per barrel and stay there before current account positions swing into a deficit in Saudi Arabia, the UAE, and Kuwait, he added.

Richard Thompson, editorial director at GlobalData, said it is impossible to quantify the full extent of the impact of COVID-19 on regional economies as the extent of infections is only just beginning to emerge and the numbers are climbing rapidly.

“But it is certain to be profound,” he said, adding that a further reduction in oil revenues will add more pressure to the already-squeezed finances of regional governments and will inevitably lead to cuts in spending, which will affect projects and other capital investments.

“This will reduce business opportunities and increase competition. It is also likely to increase delays in payments as public and private sectors investors and developers try to manage their cash flows,” said Thompson.

In addition to health concerns, the economic risks for the region are profound and include a drop in oil prices, a slowdown in economic growth, a fall in consumer spending and real estate values, as well as public spending cuts. A number of GCC non-oil sectors such as tourism, trade, hospitality, and logistics, among others, are also externally facing pressure.