Coronavirus impact on GCC economies could be much bigger

“Our econometric models now point to Mena regional real GDP growth of 2.1 per cent in 2020 from 2.8 per cent previously and for the GCC region, our models signal real GDP to register 1.7 per cent this year from 2.5 per cent previously,” said Ehsan Khoman, Head of Research and Strategy at MUFG Bank in a newly published note.

Moving goal posts

In early February, most analysts and governments had anticipated the containment of the virus by early March and the impact to be limited in the region.

“The main feed-through into the GCC is from the hydrocarbon sector, and we have lowered our average oil price and production assumptions for 2020. Consequently, we have made some tentative downward revisions to our headline GDP growth, fiscal and current account forecasts,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

The latest data suggest virus has cast its dark shadow over the Middle East, as it does globally, and the impact on regional economies are far greater than the original estimates. Worldwide, at least 86,000 people have now been infected, with close to 3,000 deaths.

The virus continued to spread in the region with Iran on Saturday reporting nine new deaths from and 205 fresh cases in, bringing its overall toll to 54 dead and 978 infected. The GCC tally of infections stands at 46 cases of coronavirus in Kuwait, 38 in Bahrain, six in Oman and 21 in the UAE.

“In early February, our working hypothesis was that the coronavirus (COVID-19) outbreak would be contained, with negligible ramifications for the Mena region. Since then, the risk of global supply chain disruptions has become more acute, and increasing incidences of community spread have started to weigh on everyday consumption in some Mena countries,” said Khoman.

MUFG Bank has revised the growth outlook for all GCC countries in the context of the virus outbreak

Transmission channels

According to Khoman, the four main transmission channels of coronavirus on the Mena region stems from; slowing Chinese energy (oil, gas and petrochemicals) demand from the region; slowing Chinese tourism flows into region; Chinese disruptions to supply chains impacting trade flows and precipitously lower oil prices with the virus proving to be a defining moment for markets with a significant hit to global oil demand.

S&P analysts said they expect implications of the new coronavirus outbreak could weigh on growth prospects in the Gulf Cooperation Council (GCC), given the importance of the Chinese economy to global economic activity.

China contributes between 4 per cent and 45 per cent of GCC countries’ total good exports, with Oman being the most exposed. “Virus-related travel restrictions, if not lifted as we expect, could weigh on the GCC’s hospitality industry, but more so in Dubai, which received almost 1 million visitors from China in 2019,” said Mohammad Damak, Director of Research at Standard & Poor’s.

The rating agency expects the impact will be limited for GCC as a whole, assuming the virus will be contained by March 2020, allowing travel and other restrictions to be unwound in the second quarter, and there’s no major impact on oil prices.

However, analysts said if the virus continues to spread, there is a risk that the economic impact could increase unpredictably

Should lower oil prices endure for a protracted period, this could be a testing period for the region’s oil exporters with significant impact on economic outlook.

Key sectors impacted by the outbreak

In terms of oil exports Oman is the most exposed GCC country to China accounting for 45.1 per cent and the UAE the least exposed with just 4.2 per cent of exports to China.

While S&P expects the average oil prices to be above $60 a barrel in 2020, the rating agency expects the OPEC’s current production quotas could be extended beyond March, which could affect the current account receipts of GCC countries.

Travel and tourism

Sectors in the region’s hospitality industry such as airlines, hotel and retail could feel the effects in the short-run. Reported data suggests 1.4 million Chinese tourists visited GCC in 2018, this figure is projected to grow to 2.2 million by 2023. However, the impact of the virus outbreak could see lower tourism arrivals across the GCC, especially the UAE.

Chinese passengers accounted for 3.9 per cent of the total passengers passed through Dubai International Airport in 2018.

“Of the six GCC countries, the UAE appears to have the highest contribution from Chinese nationals to airline traffic, tourism, retail spending and real estate,” said S&P’s Damak.

With the travel restrictions now going beyond Chinese visitors, regional airline and travel industry are facing pressure.

Saudi Arabia has temporarily stopped religious visits and tourist visa holders from countries with reported cases of infection will be denied entry. According to MUFJ Bank, 9 million individuals visit Saudi Arabia for religious (Hajj and Umrah) pilgrimage, accounting for a significant portion of travel receipts, which amounted to an estimated $13 billion, 1.7 per cent of GDP last year.

Our econometric models now point to Mena regional real GDP growth of 2.1 per cent in 2020 from 2.8 per cent previously and for the GCC region, our models signal real GDP to register 1.7 per cent this year from 2.5 per cent previously.

- Ehsan Khoman

Following reports of infection cases in Iran, neighbouring countries have begun to cut air links. Bahrain has stopped flights from Dubai and Sharjah in the lower oil prices.

Major travel disruptions due to the new coronavirus have already caused a roughly $100 million loss to airlines in the Middle East, which serves as a connection hub for east-west travel, the industry’s main trade association said Monday.

Dubai, which is home to the world’s busiest airport for international travel, relies heavily on tourism and aviation. The Gulf is a major transit hub for passengers connecting from Europe to Asia. The UAE has cancelled all flights to Iran, as have other Gulf countries. It has also limited flights in China to just Beijing to reduce the spread of the virus.

The International Air Transport Association, which represents around 290 airlines, said a projected 4.6 per cent growth in passenger demand in the Middle East this year will be halved to just 2.3 per cent if conditions do not change.

Retail

Analysts said the outbreak looks likely to dent non-oil activity further, due to disruptions to travel, which has second-order implications for airlines, hotels and the retail industry.

Expo 2020

Dubai is set to host Expo 2020, starting October this year. Expo is expected to attract 25 million visitors over the six-month period. Analysts expect the virus outbreak will be contained much ahead of the Expo and is unlikely to impact the event or visitor numbers.

Real estate

Overall, low number of Chinese nationals own property in the GCC. Most of the exposure estimated at about $460 million is in the UAE. Analysts said there could be indirect impact on property buying as the outbreak might result in some Chinese nationals postponing their decision to buy property.