Dubai: Leaving behind the impact of COVID-19 outbreak, GCC economies are poised for a strong rebound supported by accelerated efforts towards economic diversification, according to a recent MUFG research note.
Decade-old concept of GCC relying on oil and gas has led to overdependence on energy prices, an underdeveloped private sector and low productivity growth. The impact of pandemic on the regional economies is driving the region to a path towards a new economic model.
‘This time is different’
“We are taking comfort that the “this time is different” mantra is bearing fruit – vigour of authorities to realise transformation strategies is gaining speed,” said Ehsan Khoman, Head of Emerging Markets Research – EMEA, MUFG.
Diversification will require patience given the scale of the structural shifts at hand, but impediments to investments and productivity is being reversed.
The MUFG report notes that the cyclical tailwinds stemming from robust vaccination programmes and ongoing re-openings of economies are offering the region the space for strong recovery. With the oil prices remaining firm, deficits are narrowing and funding flows are strong.
Saudi and UAE lead
Saudi Arabia and the UAE are forecasted to lead GCC’s real GDP growth in 2021 given its recovery in non-oil GDP, with a rebound in domestic demand, higher investment levels.
According to MUFG, although the UAE’s full year GDP has yet to be released for 2020 and there is no consolidated data for 2021, high frequency indicators continue to point to a cycle that has turned significantly.
The UAE is exceptionally well placed to catch the first tailwinds of any normalisation in international travel, with the start of World Expo 2020.
MUFG expects UAE’s fiscal policy is likely to loosen as the forecast period wears on, with oil at $70/b all but closing the budget shortfall and structural reforms are set to persist, building on 2020 gains.
Effective COVID-19 management
Data on infections, mortality rate and vaccinations from GCC countries show that the region as whole has been successful in addressing the pandemic effectively. GCC case and fatality numbers remain at negligible levels owing to the rapid speed of vaccine inoculations and prudent reopening strategies.
Following the twin oil-virus shocks, high vaccination rates and ongoing re-openings is spurring GCC’s GDP growth. However the recovery is not uniform across all GCC countries given differing policy responses. While Saudi Arabia and the UAE lead in robust policy response.
According to MUFG’s assessment, accelerating outbreaks of COVID-19 have not weighed on GCC economic activity over time – a testament that individuals have accepted, as mobility levels remain robust despite high cases recently.
At the country level, Saudi Arabia’s mobility remains the stand-out as the only GCC economy with mobility levels those pre-virus, with Bahrain, UAE and Qatar following – Oman and Kuwait remain the laggards.
“Surge in oil prices is having a transformational impact on GCC external account positions, boosting national savings and offering forex support,” said Khoman.