COVID19 has dealt a crippling blow to the majority of economies worldwide. Countries contributing to more than 90% of the world’s GDP have experienced a disruptive lockdown for at least some time now. While each country’s first focus was on saving lives and controlling the viral spread, every country needs to start picking up the broken links of their lives and business.
An estimate by IMF predicts that the impact will be almost equivalent to the great depression of the 1930s; with almost 160 out of 170 countries having negative GDP growth this year. The slowing GDP will have widespread ripples, and impact on employment, financial sector, and manufacturing will be more profound in the coming years, as the slowing business will result in significant job losses, filed bankruptcies, and muted capital investments.
The GCC is no different and is expected to witness significant stress on its business environment. Governments, anticipating the latter, have already provided incentives in the form of monetary support to SMEs, tax deferment, and exemptions on fees for commercial assets and employees’ residency costs and many more. All of these measures are focused on reducing the impact of the downturn on the economy which is expected to recover only over a medium-term. While different economists and business advisors have given their advice to the decision-makers, our suggestions for the GCC economy is slightly different from many other economists – however, we expect this to accelerate economic recovery:
- Focus on creating a diversified manufacturing eco-system. Use the purchasing power and market of ~35 million consumers to start manufacturing some of the products locally
- Avoid maximized automation during the construction phase
- Focus on reducing cost by reducing wages in the near future
- Continue the spending program
This was based on our research referring to actions undertaken by western governments during past recessions of 40 years. Our research suggests a summary of actions, depending on the reason for the recession. However, a lot of these actions and governments could not control high unemployment, following almost 18 months post-recession.
We also analyzed the UAE and KSA economies, and their correlation to the world economic growth. We realized that the UAE’s GDP growth has an average (0.37) correlation co-efficient to the world’s GDP growth in the last 30 years; however, it has a fairly high correlation to the change in oil prices (0.52); suggesting that the UAE GDP is still largely susceptible to oil prices, which are expected to be low for the next couple of years. KSA’s real GDP growth on the other hand has a low correlation to both the world economic growth (0.36) and a change in oil prices (0.04). This is possibly due to the massive expansionary program that the KSA government has been funding for the last few years. We believe that with oil prices remaining low and the government debt to GDP ratio already rising, governments will have little elbow room to keep pumping in money for the sustainable growth and wellbeing of their people.
We believe that an extended partnership between the KSA and the UAE would leverage the power of over 35 million customers to forge joint ventures and kick start manufacturing and production with a proud tag of “Made in Arabia” that not only provides a boost to the economy and employment, but also ensures sustainability, and a much-needed non-oil diversity. What is needed is a dedicated focus on bringing the companies and ensuring initial success stories to create a manufacturing wave.
We hope and believe in a sooner rather than later economic recovery in the GCC and a resounding happiness index moving specifically in both countries: the KSA and the UAE.
About the authors
Abhishek Gupta. Abhishek has been a strategy advisor for over 18 years. He has worked with McKinsey & Co and GE Capital before starting Sutra Management Consultancies – now a 14 years old business advisory company, operating in MENA and South East Asia.
Michele Abi Saleh – Michele works on strategy advisory assignments in financial services, public security and corporate strategy domain. She is a strong advocate of women empowerment in business and leadership.