How coronavirus will hurt UAE, Gulf economies if not contained soon

Dubai: Economies of the UAE and other Gulf states will be adversely impacted by the coronavirus outbreak in China, according to Standard & Poor’s.

Analysts at the rating agency said they expect the implications to weigh on the region's growth prospects, given the importance of the Chinese economy to global economic activity. China contributes between 4 per cent and 45 per cent of GCC countries’ total goods exports, with Oman being the most exposed.

“Virus-related travel restrictions, if not lifted as we expect, could weigh on the GCC’s hospitality industry, but more so in Dubai, which received almost 1 million visitors from China in 2019,” said Mohammad Damak, Director of Research at S&P.

The rating agency expects the impact will be limited for the GCC as a whole, assuming the virus will be contained by March, thus allowing travel and other restrictions to be unwound in the second quarter and there’s no major impact on oil prices.

However, analysts said 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.

Squeeze on oil

For the GCC, it could result in a drop in oil prices, economic growth, and real estate prices, alongside a change in government spending. “Under our base-case scenario, we expect the impact on our ratings to be limited for now,” said Damak.

While the negative impact on oil prices are expected to be short-term in nature, the rating agency said the impact will be visible in terms of export volumes, in response to a projected slowdown in China's economic growth from 6.1 per cent in 2019 to about 5 per cent this year.

In terms of oil exports, Oman is the most exposed GCC country to China, accounting for 45.1 per cent, and the UAE the least exposed with just 4.2 per cent of exports.

While S&P expects average oil prices to be above $60 a barrel in 2020, it expects OPEC’s current production quotas could be extended beyond March, which could affect the current account receipts of GCC countries.

Absence of Chinese shoppers

Sectors such as airlines, hotel and retail could feel the effects in the short-run. Reported data suggests 1.4 million Chinese tourists visited GCC in 2018, and this figure is projected to grow to 2.2 million by 2023. However, the impact of the virus could see lower tourism arrivals across the GCC, especially the UAE.

Chinese passengers accounted for 3.9 per cent of total passengers who passed through Dubai International Airport in 2018. According to S&P, of the six GCC countries, the UAE appears to have the highest contribution from Chinese nationals to airline traffic, tourism, retail spending and real estate investments.

Expo 2020

Dubai is set to host Expo 2020, starting October this year. The Expo is expected to attract 25 million visitors over the six-month period. S&P analysts expect the virus outbreak will be contained much ahead of the Expo and is unlikely to impact the event or visitor numbers.

Property blues

Overall, a low number of Chinese nationals own property in the GCC. The exposure is estimated at about $460 million is in the UAE. Analysts said there could be indirect impact on property buying as the outbreak might result in some Chinese nationals postponing their decisions.