Why GCC economic recovery will be slow until 2023
Robust policies and reserves keep economies afloat amid low oil prices and COVID-19
The Gulf economies suffered in 2020. That’s true for the rest of the world too. How soon will the Gulf countries recover from the recession wrought by the perfect storm of the COVID-19 outbreak, sustained low oil prices and geopolitical challenges?
This is the first of a four-part series on the health of the Gulf economy.
Read Part 2 here: How Gulf countries are recovering from the economic slump
Read Part 3 here: How sovereign wealth funds help GCC countries weather economic shocks
Read Part 4 here: COVID-19: How GCC currencies are riding out the economic storm
What’s IMF's 2021 outlook?
Sound policies and robust reserves are keeping GCC economies resilient. Most of them are on the recovery path. But a complete turnaround will be slow. That’s what economists, rating agencies, multi-lateral agencies, and global think tanks say, citing international and domestic economic conditions.
The International Monetary Fund’s (IMF) forecast for 2021 and the year ahead are not very encouraging. It expects the GCC’s GDP growth to return to the 2019 level only in 2023. IMF’s latest World Economic Outlook published in January has no new forecast for the region except Saudi Arabia.
GCC’s largest economy, Saudi Arabia, is expected to record a 2.6 per cent growth in 2021. Last year’s estimated contraction has been revised upwards to 3.9 per cent from the October projection of 5.4 per cent contraction. Saudi growth is likely to be faster in 2022 at 4 per cent.
Since the 2021 outlook update does not include forecasts on the UAE and other Gulf countries, the October outlook stands good. The conservative estimates are the result of low oil prices, COVID-19 fallout and conflicts in the region.
Among the GCC oil exporters, Oman is expected to extend its stay in recession this year also. Its GDP contractions are put at 10 per this year and cent and 0.5 per cent next year.
A double whammy from oil price decline and COVID-19
Last year, GCC economies were slammed by a double-whammy of the pandemic and the sharp decline in oil prices followed by production cuts. The impact is likely to linger for two more years.
“Weak oil demand and large inventories are likely to remain concerns for oil exporters. While OPEC+ agreements helped stabilise oil prices, these are expected to remain under pressure until the global economic recovery takes hold,” said Jihad Azour, director of the Middle East and Central Asia Department at the IMF.
Credit rating agency Moody’s expects real GDP in GCC to return to pre-pandemic levels only after 2-3 years. The recovery will be more protracted in the economically diversified GCC countries, where key sectors such as transportation and tourism, will be slow to return to health.
“Our negative outlook for GCC sovereigns reflects the coronavirus pandemic’s impact on oil revenue and our expectations for the erosion of fiscal strength experienced last year to extend throughout 2021,” said Thaddeus Best, a Moody’s Analyst. “The still elevated cost of funding for lower-rated sovereigns in the region will amplify these strains.”
■ It represents the total annual value of goods and services produced in a country. That would generally be the sum of consumer spending, government spending, capital investments and net exports.
■ When GDP is adjusted for inflation, it’s called real GDP.
■ Non-oil real GDP is a measure of the real annual economic growth of all sectors except oil. It reflects the overall state of the national economy over consecutive years.
What is hurting the GCC countries?
According to the IMF, the prospects are tough for oil exporters and tourism-based economies, considering the slow normalisation of cross-border travel and the subdued outlook for oil prices.
Economists believe that both the oil and non-oil sectors’ growth will be modest in 2021 following sharp contractions last year.
Rating agency Standard & Poor’s forecasts real GDP growth of 2.5 per cent for the GCC over 2021-23 after a contraction of about 6 per cent in 2020.
“The contraction [of GCC economies in 2020] is split relatively evenly between the hydrocarbon (oil and gas production) and non-hydrocarbon sectors and stems from OPEC production cuts, alongside weaker regional demand due to low oil prices, and restricted economic activity due to the COVID-19 pandemic,” said Trevor Cullinan, director of Sovereign Ratings at S&P.
A $270 billion oil revenue loss in 2020
Low oil prices and heavy losses in oil exports last year have significantly impacted the oil and non-oil sectors in the Gulf. The demand loss exacerbated the sharp decline in oil prices due to the COVID-19 outbreak. That has been a body blow for the Gulf states since the hydrocarbon sector accounts for close to 40 per cent of the GCC’s real GDP.
According to the IMF estimates, the GCC countries earned $270 billion less in oil revenue compared to the previous year as the region’s economic heavyweight, Saudi Arabia, sank deeper into recession. Saudi Arabia also lost billions of dollars in revenue due to the suspension of pilgrimages to Makkah.
“We expect a broad recovery across hydrocarbon and non-hydrocarbon sectors over the period to 2023. Our base case assumption is that OPEC+ production cuts, amounting to about 17 per cent of October 2018 production, end in April 2022. Our current assumptions see Brent oil prices averaging $50 in 2021-2022 and then $55 in 2023 and beyond,” said Cullinan.
Fall in travel and tourism leads to non-oil contraction
Lower economic activity due to pandemic-driven lockdowns and curfews, the slowdown in global tourism, and planned delays in public sector capital spending weighed down the non-oil sector in 2020. The non-oil GDP growth is expected to return to the 2019 level in 2022.
The synchronised and global nature of the downturn has also led to a decline in trade, disruptions to supply chains, and a collapse in tourism that hurt more diversified economies in the region.
Relatively more diversified economies like the UAE and Bahrain faced sharper contraction. Due to the reliance on travel and tourism — two industries most affected by COVID-19 — Dubai’s economy faced the pandemic’s full impact last year. The delayed Expo 2020, which will now take place from October 1, 2021, to March 31, 2022, should provide a platform for Dubai’s recovery.
Tourism data point to a challenging environment. According to STR data, occupancy in Dubai’s hotels is still low, at 65.8 per cent in December 2020. For the UAE and Dubai, which depends more on European visitors over the peak winter months, the latest wave of lockdowns across Europe meant a significant downside risk.
Hotel occupancy in Saudi Arabia was even lower at 34.7 per cent in November. While the country is broadening its source markets, Saudi Arabia’s tourism is primarily religious. The gradual relaxation of restrictions for pilgrims arriving to perform the Haj and umrah should provide support. However, there is a significant risk of pilgrims’ home countries reimposing travel curbs.