Dubai: Oil exporting countries in the region, particularly the GCC, will benefit from the recovery in global demand, higher oil prices, and wider vaccine coverage than most other countries, according to the latest Regional Economic Outlook of the International Monetary Fund (IMF).
GCC oil exporters have brighter economic outlook, while the growth is going to be uneven for the Mena region with the oil importers lagging. For MENA as a whole, the IMF has forecast an overall real GDP growth of 4.1 per cent for both 2021 and 2022. The average growth outlook for GCC for 2021 is 2.5 per cent and for 2022 is 4.2 per cent.
The UAE’s real GDP is forecast to grow 2.2 per cent in 2021 and 3 per cent in 2022. Saudi Arabia leads the forecast with 2.8 per cent growth this year and 4.8 per cent in 2022. Higher vaccination rates, rising oil prices, and easing of restrictions are expected to work in favour of GCC and other oil exporting countries in the region.
“Prospects for oil-exporting economies improved with higher oil prices and gradually declining production curbs," said Jihad Azour, Director of Middle East and Central Asia Department at the IMF. "Vaccine rollouts and higher oil prices will also support confidence and activity in the non-oil sector, which is set to expand by 3.9 and 3.4 per cent in 2021 and 2022, respectively.”
Inflation, fiscal strength
All oil exporters in the region are not equal in inflation outlook. While non-GCC inflation is projected to rise to 10.5 per cent in 2021 and moderate to 8.0 per cent in 2022, inflation in the GCC countries are forecast to peak at 2.8 percent in 2021 and contracting to 2.4 per cent in 2022.
Higher oil prices and exports are expected to strengthen oil exporters’ external positions, with their current account balance projected to move from a deficit of 1.9 per cent of GDP in 2020 to a surplus of 3.6 per cent of GDP in 2021 (above the pre-pandemic level). Gross official reserves are expected to increase by $95 billion to almost $1 trillion in 2021.
Fiscal deficits of GCC countries are projected to decline, reflecting the ongoing recovery, higher oil prices, expiring support measures, and consolidation efforts. Nonetheless, government debt as a share of GDP, while declining relative to peaks reached during the crisis, will likely remain higher than its pre-crisis level over the medium term. As a result, public gross financing needs are projected to remain elevated at $473 billion overall during 2021–22, compared to $310 billion during 2018–19.
The IMF noted that the GCC countries are embracing digitalization and cross-border digital transactions through initiatives such as 'Project Aber' which enables cashless gross settlements in trade transactions. According to the IMF, countries should invest in digital infrastructure to better identify vulnerable groups, deliver support, promote financial inclusion, and catalyze new growth and employment opportunities.
“Expanding digital technologies, which were key to the crisis response, would help deliver safety nets, develop new growth sectors, and ensure the region stays competitive globally,” said Azour.
COVID-19 has left some firms more vulnerable than others. The pre-pandemic worse-performing firms entered the crisis with impaired debt-service capacity (negative interest-coverage ratio [ICR]) and high debt burden, according to the IMF.
Despite reducing their production costs sharply and receiving policy support, liquidity, and solvency risks have risen for these firms. By contrast, pre-pandemic better-performing firms - largely resilient during the pandemic - face low liquidity and solvency pressures.
Firms that entered the crisis with already high levels of debts and pulled through during the crisis with the liquidity support from the government are likely to come under pressure when the support measures are withdrawn.
High-debt accumulation in a period of subdued earnings heightens solvency risks.
“The region’s firms may have averted the worst, but a protracted health crisis and limited policy space may exacerbate liquidity and solvency risks, with spillover effects to the financial sector," the IMF said. "Despite current favorable financing conditions, the pandemic has left a legacy of impaired debt-service capacity and exacerbated debt overhang in an important subset of firms, which, if unaddressed, could prompt financial stability risks and a prolonged period of weak economic performance.”