Dubai: Oil exporting countries in the Middle East and North Africa (Mena), especially the GCC countries are expected to experience a drastic slowdown in economic growth due to the impact of coronavirus outbreak (COVID-19) and a plunge in oil prices and global oil demand, according Institute of International Finance (IIF).
“Quarantines, disruption in supply chains, the crash in oil prices in light of the breakdown of OPEC+, travel restrictions, and business closings point to a recession in the Mena region, the first in three decades. Governments are trying to mitigate the economic damage with stimulus packages, but many are starting from a weak position,” said Garbis Iradian, Chief Economist, Mena of IIF.
Central banks in the region have cut policy rates and announced plans to provide liquidity to financial institutions, particularly those lending to small and medium enterprises (SMEs).
Hydrocarbon exporters in the region face an additional direct hit from the crash in oil prices.
“We downgraded non-oil growth in Saudi Arabia from 3 per cent to 0.8 per cent, and deepened the recessions in Algeria, Iraq, and Iran. We assume modest increases in oil production in Saudi Arabia, the UAE and Kuwait, leading to higher headline growth,” said Iradian..
The service sector activity will be hit the hardest as a result of containment efforts and social distancing. All exporters are likely to record large fiscal deficits due to the collapse in oil revenue, leading to a rise in public debt.
Current account and fiscal deficits
Based on the IIF's baseline scenario of an average oil price of $40/bbl, the nine Mena oil exporters would see a fall in hydrocarbon earnings in 2020 of $192 billion (11 per cent of GDP). Consequently, the cumulative current account balance would shift from a surplus of $65 billion in 2019 to a deficit of $67 billion in 2020, and the fiscal deficit would widen from 2.9 per cent of GDP to 9.1 per cent. Unlike the previous four years, more than two-thirds of the financing need would be raised domestically and by tapping large financial buffers particularly sovereign wealth funds (SWFs).
GCC countries with limited fiscal space such as Bahrain and Oman are expected to face substantial pressure to ramp up public services and support affected sectors.
Liquidity in banks could tighten as oil related bank deposits decline, and non-perfoming loans could rise. Still, most GCC banks are well-positioned to absorb the shocks.
IIF economists expect growth in Mena oil importers to decline by 2.4 percentage points to 0.8 per cent in 2020, the lowest since the early 1990s.
“The potential benefits of lower oil prices are unlikely to overcome the drag from dramatic limits on movement of people and goods within national borders to prevent unchecked spread of the virus, along with deep ties to oil exporters in the region as well as to economies elsewhere that are already seeing rapid contraction,” said Jonah Rosenthal, Associate Economist.
A global recession will lead to a reduction in trade, foreign direct investment, tourism flows, and remittances to Egypt, Jordan, Morocco, and Lebanon. Egypt also stands to see a significant drop in Suez Canal transit revenue, according to IIF economists.
Non-resident capital flows to the Mena region are expected to decrease from $182 billion in 2019 to $101 billion in 2020, on the back of lower equity and debt flows. As in 2008 and 2009, resident outflows (mostly in the form of SWFs) will also decline sharply (from $215 in 2019 to $136 billion in 2020) reflecting the increasing need to tap SWFs to finance the large deficits.