Looking back, it's easy to forget that many of the major Middle East economies were already having an extremely tough time before the pandemic arrived.
Tumbling oil prices, depressed real estate and subdued tourism were just some of the issues the region was grappling with before everything changed in March. Governments were thinking about how they might need to adjust their ongoing reform agendas to cope with fast changing realities.
This is why the regional policy response to this pandemic has been all the more remarkable...
The recently published report by CFA Institute - COVID-19 Response Measures in the MENA Region - summarizes the steps taken by governments over the last year in their fight against the pandemic. It reveals many similarities with the approaches taken - as well as some significant differences.
For example, the large-scale central bank interventions in asset markets and direct government wage subsidies seen in the large, developed economies were not observed in the Middle East. Instead, MENA governments extended support through budgetary spending and loan guarantees designed to keep credit flowing to the real economy. In addition, temporary loan payment holidays helped to support households and the SME sector hardest hit by the economic impact of the pandemic.
The size of these relief measures varied significantly across the region. In terms of immediate budgetary spending, Qatar’s package was large by global standards at 11.5 percent of GDP, and noticeably higher than the average of 2.6 per cent of GDP in the MENA region. Also notable was Bahrain’s expansion of its central bank loan facilities to enable debt deferrals and new credit creation. This measure - at 25 per cent of GDP - was uniquely large in the region.
Traditional monetary policy did not play a significant role in the region, which is understandable given that Jordan and the Gulf states of Bahrain, Oman, Qatar, Saudi Arabia, and the UAE all have currencies pegged to the dollar. This means that interest rates must follow the dynamics set by the US Federal Reserve, which cut its policy rate by 50 basis points on March 3 and by another 100 basis points less than two weeks later.
More distress in store?
The deployment of long-awaited vaccines in recent weeks has been met with understandable euphoria. But there is no vaccine for businesses and industries left wounded by the devastating financial impact of the virus this year.
As governments begin unwinding expensive support measures, more businesses will be left to sink or swim in our new reality. Only at this stage will the longer-term economic impact become more visible.
We began by recalling the economic fragility of the Middle East at the start of this year. It is important to remember that the challenges that affected many of the region’s big economies before the pandemic have not gone away. The next 12 months will be crucial in ensuring the long tail of COVID-19 does not inflict even more damage than the virus itself.
This is one of the questions to be posed by a forthcoming CFA Institute roundtable that will discuss the policy implications for governments, as well as the new sources of risk that may have been generated in the process.
Need careful watch
One risk that immediately comes to mind is debt management, which will be a challenge for the world at large in 2021. Deficits have soared as a result of government and corporate borrowing this year, and added significantly to national debt burdens that will be with us for a long time to come.
Governments in the Arab world will now need to display the same dexterity in tackling these risks as they did in the early days of the crisis when containing the spread of the virus was all that really mattered.
- William Tohmé is Senior Regional Head at CFA Institute, Middle East and North Africa.