Excerpted from S&P Ratings
The outbreak of the 2019 new coronavirus (Covid-19) is hitting China’s people and economy hard and could have further adverse consequences. Given the importance of the Chinese economy to global economic activity, S&P Global Ratings expects recent developments could weigh on growth prospects in the GCC, already affected by low oil prices and geopolitical uncertainty. If the virus continues to spread, there is a risk that the economic impact could increase unpredictably, with credit implications not just for China but elsewhere. For the GCC, this could result in a drop in oil prices, economic growth, and real estate prices, alongside a change in government spending, which could put pressure on issuers we rate in the region. Under our base-case scenario, however, we expect the impact on our ratings to be limited for now.
The rate of spread and timing of the peak of the new coronavirus is still uncertain. However, modeling by epidemiologists indicates a likely range for the peak of between late-February and June. For the purpose of assessing the economic and credit implications of the outbreak, we assume the outbreak will be contained in March, consistent with our recent report “Coronavirus To Inflict A Large, Temporary Blow To China’s Economy,” published Feb. 7, 2020, on RatingsDirect.
Commodity Prices And Volumes Will Determine The Economic Impact For The GCC Notwithstanding the spread of the virus, we still expect oil prices to remain at $60 per barrel in Coronavirus Increases and decline to $55 from 2021. Therefore, we think the impact of the new coronavirus on GCC economies will be felt mainly in terms of export volumes. Exports could decline in view of an anticipated slowdown of economic growth in China, which in our base case we project at 5% in 2020 compared with 6.1% in 2019. OPEC’s current production quotas could also be extended beyond March, which could affect our estimates of fiscal and current account receipts for GCC sovereigns.
GCC countries send 4%-45% of their exported goods to China, with Oman being the most exposed (45.1%) and the United Arab Emirates (UAE) the least exposed (4.2%) based on the latest available data from the U.N.’s Comtrade database (2018).
Travel And Tourism could see a decline. Sectors in the GCC’s hospitality industry–such as airlines, hotels, and retail–could also feel the effects of lower tourism inflows since the new coronavirus outbreak. This is especially because it started just before the Chinese new year, when travel to and from China typically picks up. The Chinese government has introduced travel restrictions related to the virus, and some travelers are cancelling their trips to minimize the risk of infection. The impact is compounded by the fact that Chinese tourists tend to spend more than the average: According to Nielsen, on-location spending by Chinese tourists is the fourth largest in the world at $3,064 per person. Reported data suggests that around 1.4 million Chinese tourists visited the GCC in 2018 and this figure could rise to 2.2 million in 2023, with the United Arab Emirates (UAE) as the main destination.
In addition, several airline companies have suspended flights to Chinese cities to reduce the risk of transmitting the virus. Emirates and Qatar Airways have the highest number of weekly connections from the GCC to Chinese cities. Moreover, Chinese passengers accounted for 3.9% of passengers passing through Dubai International Airport in 2018. Of the six GCC countries, the UAE appears to have the highest contribution from Chinese nationals to airline traffic, tourism, retail spending, and investments in real estate. Moreover, Dubai is set to host Expo 2020, which starts in October. Officials expect Expo 2020 to attract 25 million visitors over a six-month period, with more than 70% coming from outside the UAE. If the effect of the new coronavirus continues to be felt beyond March, the number of visitors could be lower than expected.