Dubai: The rapid spread of the coronavirus has fundamentally changed the global economic environment and a recovery is going to be gradual across the world and in the region, Markus Wiedemann, Chief Investment Officer of Liechtensteinische Landesbank (LLB) said in an interview.
“Most economists believe that a full recovery will take time – this is likely to be the case for UAE as well. The OECD expects that economic output in industrial countries at the end of 2021 will still be below the pre-crisis level, even if there is no second wave of infections,” said Wiedemann.
Oil price key to recovery
Regional economic growth in 2020 and 2021 will be slow and anemic. The collapse in Brent as well as the spending by the GCC bloc to counter the economic effects of Covid-19 come at a huge cost.
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“The region’s oil dependence plays a major role in the rate of the recovery by acting as a pace setter - higher oil prices naturally stimulate the regional economies in the Gulf, therefore steadily rising Brent prices are paramount to ensuring a sustainable recovery into 2021,” said Wiedemann.
According to the International Monetary Fund (IMF), Saudi Arabia’s economy, the largest economy in the region, is projected to contract 6.8 per cent in 2020. Saudi is expected to gradually return to growth in 2021 of about 3.1 per cent, while Qatar is expected to rebound the highest to 5 per cent ahead of the planned 2022 World Cup.
The region’s oil dependence plays a major role in the rate of the recovery by acting as a pace setter - higher oil prices naturally stimulate the regional economies in the Gulf, therefore steadily rising Brent prices are paramount to ensuring a sustainable recovery into 2021.
Need for more fiscal support
“Austerity measures and “belt tightening” in the form of sharp government spending cuts have been implemented across the GCC swiftly and will have an adverse impact on growth in the short to medium term across the region. KSA may be sighted here again as the Kingdom took this opportunity to increase VAT to 15% from 5% in an attempt to alleviate pressures on its balances and ensure its credit rating (S&P: A-) as well its Dollar peg remain intact which is crucial to the GCC as a whole,” said Wiedemann.
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Bahrain and Oman remain the weakest links with the vulnerability ratings in the GCC with breakeven oil prices of 81.1 and 72.2 respectively and external debt to GDP of 192.9 and 105.6 respectively. The prevailing consensus however remains intact that both would receive immediate support from the greater GCC block should they be in danger.
Numerous important events that would have majorly contributed to GDP growth in the region like Expo 2020, Grand Prix races held in Bahrain and Abu Dhabi, cancellation of the annual Hajj, and the suspension of the Umrah season in Saudi Arabia as well as all of the above should be taken into account and point to a slow and gradual recovery that hinges on multiple factors. The potential recovery of the region could be predicted to take the form of a U.
Recommendations for investors
The coronavirus crisis has had massive impact on LLB’s business – in negative and positive ways. “We made sure, however, that we were fully operational as a bank in all our markets all the time. On one hand, this helped us to drive innovation forward. We increased the options of working from home for our employees drastically - which most of our team members in Abu Dhabi and Dubai made use of,” said Ludovic Pernot, Head of Private Banking Middle East, LLB.
As for investment strategy LLB recommends its clients to stick to their investment strategy set out with their respective client advisor. In terms of equity strategy, the diminished equity risk premiums after the run-up in prices leave little room for further gains for the overall market. On the other hand, the bank said investors can make use of sector rotations during this market phase, but this requires active management. Overall, we recommend a moderate underweight in equities in order to profit from setbacks.
The performance of global sectors (MSCI) since the beginning of the year shows that price developments vary considerably. Technology shares have in some cases even posted new all-time highs, while energy and financial shares continue to trade at very depressed price levels. Within the financial sector, the bank continues to emphasize insurers, whose shares suffered less from operational costs due to the pandemic than from price losses in the investment markets.
Dubai being a prime tourist destination, a global travel hub and has an economic focus on real estate development as its main growth driver and GDP contributor, is adversely impacted by the pandemic and the consequent economic contraction.
Adding to the pressures has been a shift in demographics whereby an increasing number of skilled labour market participants have retreated to their country of origin as a result of either losing their job or for personal reasons during this global pandemic.
“The short-term effects of such a shift will have an immediate adverse impact on the real estate rental market as well as on the retail sector. This trend may however snap back and reverse as soon as global lockdowns are eased, mobility is no longer an issue and the UAE returns to growth in the next few quarters,” said Wiedemann.
A global rebound in travel would have an immediate positive effect on the UAE and in particular on Dubai, which Dubai travel and tourism industry is expecting will take place in the next few quarters. “We remain optimistic on the UAE and note that this is not the first severe cyclical downturn the Emirate has faced. It remains well positioned to immediately benefit from any kind of global bounce-back, he said.