Stock Kuwait city skyline
Stock Kuwait city skyline. Analysts had been cautioning how economic rebound in the Gulf region was likely to remain slow-going against the backdrop of renewed lockdowns in key economies worldwide and persistently declining oil prices. Image Credit: Shutterstock

Dubai: While economies in the Middle East strive to regain footing amid a raging COVID-19 pandemic, like many nations worldwide, economists warn of recovery slowing in some parts of the region.

“This week’s US election has yet to reach a conclusive result, but some of the potential downside risks facing the Middle East and North Africa appear to have diminished,” opined James Swanston, a Middle East and North Africa Economist in the Emerging Markets team at London-based research firm Capital Economics.

“Meanwhile, OPEC+ seems to edging closer to an extension of its current oil production quotas which will dampen recoveries in the Gulf.”

Twice the problem for GCC

The combination of a COVID-19 pandemic and a collapse in oil prices has affected all aspects of the economies in the Gulf States (GCC). The region’s economies are projected to contract by 5.2 per cent in 2020, the World Bank estimated last month.

The estimates were 4.1 percentage points below the forecast in April 2020, and 7.8 percentage points worse than that of October 2019, which the global lender said reflects a much pessimistic outlook for the regional economy, while cautioning that the region is expected to recover only partially in 2021.

Additionally, the International Monetary Fund downgraded its outlook for Middle East economic recovery just weeks earlier, predicting a 4.1 per cent contraction for the region as a whole. The global fund does not see oil staging a dramatic recovery next year, seeing prices in $40 to $50 range in 2021.

Coping with dual shock

Countries in the Middle East have been facing dual shocks of both a COVID-19 pandemic and a collapse in oil prices. The cost to the region of both of these shocks is estimated at $116 billion. Brent crude, which averaged more than $64 last year, plunged in March and April as the pandemic stifled fuel use.

Trade volumes are estimated to have fallen sharply, with preliminary data for April from the United Nations Conference on Trade and Development suggests a roughly 40 per cent decline in trade for the region.

Moreover, the World Bank had flagged how the downturn is expected to accelerate in sectors with strong value chains, particularly in electronics and automotive products.

Slowing economic rebound

Analysts had been cautioning how economic rebound in the Gulf region was likely to remain slow-going against the backdrop of renewed lockdowns in key economies worldwide and persistently declining oil prices, and October’s industry indicators from across the Middle East being a mixed bag didn’t help.

New COVID-19 infection cases have been rising in Iran, which is battling the Middle East’s worst outbreak, and the pandemic also continues to spread in OPEC’s second-biggest oil producer Iraq.

“In North Africa and Jordan, virus outbreaks have worsened and restrictions are being tightened,” Swanston cautioned. “The result is that economic recoveries could be even more sluggish than we had anticipated.”

Ballooning debt, a concern

Swanston also noted how the deterioration in Gulf public finances this year has pushed governments across the region to finance a significant portion of their budget deficits through international debt markets, “which we expect to continue in the coming years”.

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“While this doesn’t raise concerns about public debt ratios in most of the Gulf, we are increasingly worried about Oman and Bahrain,” Swanston added. Oman last month was the latest government in the Gulf to tap international bond markets, taking the region’s issuance so far in 2020 to an annual record.

“In Oman’s case, while this will help to finance large twin budget and current account deficits, it will push the public debt-to-GDP ratio even higher and add to our concerns about weak public finances,” Swanston further added. “We think that Oman, along with Bahrain, will ultimately have to rely on financing from their Gulf neighbours to keep dollar pegs intact.”