The GCC is not immune to the economic crises enveloping the globe now or post COVID-19. A recession is underway and yesterday, the Institute of International Finance (IIF) said the GCC is facing its worst economic crisis in history.
Not to oversimplify the devastating effect of the 2019/20 Coronavirus has on economies, the GCC has been there before and is already taking steps to withstand and endure for the long haul.
As posted by Reuters, the GCC is facing the double shock of plunging oil prices and the coronavirus pandemic, quoting the IIF.
“Real gross domestic product (GDP) will contract 4.4% this year, despite some indications that the virus spread has been successfully contained and the easing of some restrictions in recent weeks,” said the IIF.
It added that cuts in public spending adopted by regional authorities to contain the widening of their deficits “could more than offset losses stemming from reduced oil exports” but aggregate deficits are still expected to widen to 10.3% of GDP this year from 2.5% in 2019.
Saudi under pressure
Rachel Ziemba, founder of Ziemba Insights and adjunct fellow at the Center for a New American Security and Gulf International Forum said Saudi (and other Gulf states) won’t easily move away from the patronage system and the large public wage bill.
“The reduction in allowances in Saudi Arabia coupled with an increase in VAT (times 3) will raise the cost to households, … put additional political pressure on nationalising the workforce and increase the cost of hiring expats,” Ziemba said.
In 2015, during the last economic downturn, Saudi Arabia put into effect austerity measures, which included a cut in subsidies that resulted in higher utility costs for Saudi nationals. Shortly thereafter, in 2016, certain allowances, bonuses and financial benefits for civil servants and military personnel were cancelled and suspended.
Yet, in 2017, these allowances were reinstated,
Saudi Arabia, the region’s largest economy, could see its real GDP shrink 4% this year and its deficit widen to 13%, according to Reuters.
The Saudi central bank said recently it would inject an additional $13.3 billion into the local banking system to help banks support the private sector.
According to the IIF, the regional banking system remained solid, with strong liquidity and capitalisation, and relatively low non-performing loans.
Opportunities to rise over crisis
According to a May 2020 CNBC article, Middle Eastern countries should make changes to build up the resilience of their economies, quoting Alain Bejjani, the chief executive officer (CEO) of Majid Al Futtaim, a UAE-based retail giant.
“That could include addressing systemic issues and providing more support to businesses,” said Bejjani.
“I think this is a golden opportunity to really change, to reform and to transform our economies into more resilient economies that have (the) ability to bounce back faster,” he told CNBC.
Gulf News for its part said the GCC economies will not collapse for several reasons.
“First, they established strong financial reserves between 2004-14, with GCC sovereign funds among the world’s top seven, while ital financial reforms were also carried out and now, spending is being revised and rationalized, while the financial response builds on previous experiences,” the daily said.
Liquidity support measures introduced by GCC authorities to support banks amount to 4% of GDP, or $54 billion, the IIF report said.
A healthy sign are Construction Projects worth $5.5 billion which had been announced across the GCC in April 2020, primarily driven by Saudi Arabia, which contributed 67% of the total value of announcements.
According to the 18th edition of the BNC Network’s journal (entitled The Post-COVID Expo), the GCC construction market is estimated at $2.4 trillion, with more than 23,000 active projects at the end of April.
GCC reopening phase
According to Trade Arabia, lockdowns and social distancing measures are beginning to ease across the GCC countries given tentative signs that these economies are passed the peak with a flattening in the curve of new Covid-19 cases on the horizon, quoting a new report by MUFG, a leading global financial services group
“Our examination of countries that have reopened more versus less speedily across the world thus far, offers three encouraging lessons,” the report said.
“First, early reopeners have not witnessed higher confirmed Covid-19 incidences thus far. Second, corporates and broader financial markets have tentatively begun to reward the early reopeners with modestly higher asset returns and easier financial conditions, and third, not all reopenings are homogeneous with heterogeneity abound across countries, and if medical outcomes can avoid left tails, corporates and markets may reward reopenings.”
Saudi Arabia has started implementing a three phased approach to easing restrictions, with all curfews to be lifted by 21 June.
Dubai has relaxed free movement, allowing business activity to resume during reduced curfews from 11pm to 6am. On 21 May, Emirates airlines which has formally requested financial support from the government, resumed flights to nine destinations.
Oman will allow business activity to resume and has ended the lockdown within the capital
Since 22 May, certain Bahraini commercial and industrial business activities have reopened.
The Kuwaiti government did not extend its full curfew beyond 30 May and instead switched to a 12 hour partial curfew from 6pm to 6am commencing 31 May, as part of a five phase plan.