GCC economies Part 2
Image Credit: Pixabay/Gulf News

The coronavirus vaccinations offer prospects of achieving herd immunity. An immunity that will allow us to return to our normal lives. When we get our lives back, domestic demand for goods and services will perk up. People will travel more, which is good news for the travel, tourism and hospitality industries. Soon the benefits will trickle down to other sectors as well. So vaccinations are critical for the health of economies worldwide.

The second part of the four-part series on Gulf economies looks at the recovery prospects of each country.

Read Part 1 here: Why GCC economic recovery will be slow until 2023

Read Part 3 here: How sovereign wealth funds help GCC countries weather economic shocks

Read Part 4 here: COVID-19: How GCC currencies are riding out the economic storm

UAE: Domestic demand and exports will spur growth

The UAE economy is poised for faster recovery from this year, according to the Institute International Finance (IIF), a Washington based association of global banks and financial institutions. In its February report, the IIF observed that the UAE had limited the health impact from COVID-19 due to the relatively young population and strict coronavirus containment measures.

Although the economic recovery is limited this year, the IIF says, the country is going through a fundamental transformation that will spur growth.

“We expect a modest economic recovery in 2021 with real GDP growing by 2.3 per cent, following a contraction of 5.7 per cent in 2020. The recovery will be supported by the partial recovery in domestic demand and an increase in net exports,” said Garbis Iradian, Chief Economist, MENA, IIF.

Dubai Shoppers
Shoppers at the Mall of the Emirates during the Dubai Shopping Festival 2020. Image Credit: Antonin Kélian Kallouche/Gulf News

The UAE has been largely successful in containing the spread of the virus despite the spike of infections early this year. Testing and rapid vaccination programmes are expected yield results in the near term.

“A relatively young population, improved testing, and better treatment in hospitals have kept the number of deaths in the UAE low,” said Iradian.

Businesses started reopening in September, travel restrictions are lifted, and international borders have been partially reopened: all this helped soften the economic impact.

The sharp drop in tourism and real estate activity dragged down the non-hydrocarbon sector last year.

“We expect a gradual economic recovery from 2021, but with real GDP only to recover to close to 2019 levels by 2023,” said Trevor Cullinan, director of Sovereign Ratings at S&P

Saudi oil rig
Saudi Aramco’s rigs in HSBH field north of Dhahran in the eastern province of Saudi Arabia. Image Credit: AFP

Saudi Arabia: Growth returns this year

Saudi Arabia’s economy is likely to turn around this year with the support of oil and non-oil sectors combined with effective containment of COVID-19 infections, according to the Institute of International Finance (IIF).

The latest IIF forecasts show the Saudi GDP is expected to grow 2.4 per cent in 2021 compared to a 4.2 per cent contraction in 2020. “We expect a modest economic recovery in 2021, with non-oil real GDP growing by 3 per cent in 2021, following a contraction of 2.7 per cent in 2020. The recovery will be supported by the large PIF [Public Investment Fund] projects underway,” said Garbis Iradian, Chief Economist, MENA, the IIF.

Last year, Saudi net exports dwindled due to oil production cuts, bringing down real GDP. S&P found broad declines across non-oil sectors and steep drops in wholesale and retail trade and restaurants and hotels. The government’s fiscal consolidation measures included a July increase in VAT to 15 per cent from 5 per cent and reduced domestic consumption in the second half of the year.

What’s oil GDP and non-oil GDP?
■ Gross Domestic Product (GDP), an indicator of the health of a country’s economy, represents the total annual value of goods and services produced in a country.
■ Oil real GDP refers to the annual economic growth of the oil industry. It is the net value of all goods and services in the sector.
■ Non-oil GDP is a measure of the annual economic growth of all sectors except oil.
■ When GDP is adjusted for inflation, it’s called real GDP.

Preliminary official data show that the Saudi economy contracted by 4.1 per cent in 2020, driven by a sharp contraction in oil GDP. The non-oil real GDP shrank only by 2.7 per cent, a less severe drop than in many other G20 countries due to the kingdom’s relatively small services sector and young population.

The recession has triggered significant job losses, with the national unemployment rate rising to 14.9 per cent in the third quarter of 2020, partly due to the higher national labour force participation rate (49 per cent).

Recent economic data, including credit to the private sector and the PMI [Purchasing Managers’ Index], suggest that output growth has been accelerating in recent months. The kingdom has implemented a range of measures to mitigate the economic damage, including fiscal packages, easing monetary and macroprudential rules [rules aimed at reducing risks to the economy and financial system], and providing adequate liquidity to the banking system.

What’s Purchasing Manager’s Index (PMI)?
■ The Purchasing Managers’ Index (PMI) reflects the economic trends in the manufacturing and service sectors.
■ It is based on a monthly survey of supply chain managers across 19 industries.
■ It provides information on current and future business conditions to company decision-makers, analysts, and investors.

Bahrain: Infrastructure development offers a way out

Bahrain is less dependent on hydrocarbons than the rest of the Gulf. Although the economy was projected to contract by 5 per cent last year, the government move to promote infrastructure development is likely to help the GDP recover to 2019 levels next year.

COVID-19 and the fiscal adjustment are weighing down domestic demand, but a healthy infrastructure project pipeline — including the building of the King Hamad Causeway, the modernisation of the national oil company (BAPCO), and the new Aluminium Bahrain (Alba) line 6 — will support non-hydrocarbon growth beyond 2020.

Saudi Bahrain causeway
The causeway connecting Saudi Arabia and Bahrain. The two countries are connected by the King Fahd Causeway. The King Hamad Causeway will run parallel to the current link, and work is set to begin in 2021. Image Credit: SPA

Major infrastructure projects are financed mainly by the GCC’s $10 billion support package of 2018. Lower oil revenues will more than offset the continued cut in spending, leading to a wider fiscal deficit in 2020.

The voluntary retirement scheme will have a beneficial effect on the wage bill as the public sector workforce has shrunk by 18 per cent. Bahrain returned to the international debt market in the first half of 2020 with $2 billion in debt issuance, equally split between sukuk and conventional Eurobonds.

The normalising of relations with Israel is also expected to have a positive impact on the economy.

Kuwait: Reliance on oil keeps growth sluggish

Since Kuwait’s economy is heavily dependent on hydrocarbons, oil production cuts will keep the economic growth sluggish. From next year, as additional oil production capacity comes online, including from the restart of production in the Joint Neutral Zone with Saudi Arabia, Kuwait’s growth could gain momentum.

Kuwait has lagged in implementing a medium-term reform plan to address fiscal sustainability and enhance the private sector’s role. In the context of prolonged low oil prices, the loose fiscal policy has been a concern. Public spending and the plunge in oil revenues will lead to a fiscal deficit of 7.3 per cent of GDP or a shortage of 25.5 per cent of GDP, excluding investment income.

Kuwait’s Ratqa oil field. The petroleum sector plays a major role in the Kuwaiti economy by virtue of accounting for about 90 per cent of the treasury income. Image Credit: AP

Kuwait’s rating outlook was cut to negative from stable by Fitch as reforms are delayed, and that hampers borrowing.

“The revision of the outlook reflects near-term liquidity risk associated with the imminent depletion of liquid assets in the General Reserve Fund in the absence of parliamentary authorisation for the government to borrow,” Fitch said in a statement. The rating was affirmed at AA.

Unlike other GCC countries, Kuwait did not tap the international market last year as the parliament has opposed a law that would allow the government to borrow. Instead, lawmakers approved a bill to suspend the transfer of 10 per cent of revenue to the Future Generations Fund (FGF) so long as the government runs a deficit. The FGF is managed by Kuwait’s Investment Authority and controls $600 billion in foreign assets, making it the fourth-largest SWF among GCC countries.

What’s Future Generations Fund?
■ The $600 billion Future Generations Fund of Kuwait is the money set aside for a future when the oil reserves run out.
■ Managed by the Kuwait Investment Authority, the fund consists primarily of investments in Kuwait and other countries besides currency assets.

Kuwait’s economic growth was sluggish before COVID-19, with output expanding by just 0.4 per cent in 2019 and 1.3 per cent in 2018. The cut in oil production reduced the country’s volumes by at least 6 per cent in 2020.

Lower economic activity due to pandemic-driven lockdowns and curfews, the slowdown in global tourism, and planned delays in public sector capital spending added to the woes.

GDP growth is expected to return to the 2019 level next year.

Oman: Recovery begins next year

Oman is expected to haul itself out of recession only next year. The IMF estimated a 10 per cent contraction for Oman’s economy in 2020.

The IIF has a contrasting view of Oman’s economy. Its forecasts show the economic conditions in a more positive light with lower fiscal deficits than the IMF’s.

The IIF attribute it to Oman’s expected average crude oil export prices for this year, which is $4 per barrel higher than the Brent crude or IMF forecast; hydrocarbon production is likely to decline by only 2 per cent in 2020, as compared with the IMF’s projection of a decrease of 12 per cent.

Al Seeb Souq in Muscat, Oman.
A shop at the Al Seeb Souq in Muscat, Oman. Image Credit: Bloomberg

“Our projections are based on continued fiscal adjustment, including further cuts in spending and the introduction of a VAT in early 2021. Indeed, official figures for the first seven months of this year are consistent with our forecast, showing a deficit of OMR (Omani riyal) 5.24 billion, equivalent to 6.5 per cent of GDP,” said Iradian.

In response to the COVID-19 crisis, Oman initiated fiscal reforms and reorganised several ministries to reduce spending. Other measures include a 10 per cent reduction in spending on wages, defence, and transfers to public companies. A 5 per cent VAT and income tax in early 2021 could generate around 2 per cent of GDP in additional non-hydrocarbon revenue.

Other reforms include privatising state assets and more job opportunities for Omanis by reducing the number of expat employees and implementing job training programmes. Oman’s spending on public sector wages, defence, and capital expenditures is very high compared to other GCC states.

Qatar: Gas exports buoy recovery prospects

Qatar’s dependence on hydrocarbons is second only to Kuwait in the Gulf. It left OPEC in January 2019 and is not subject to its production cuts. Qatar’s hydrocarbon sector is about 80 per cent gas and 20 per cent oil, unlike other GCC economies heavily reliant on oil. However, the non-hydrocarbon sector dragged down economic activity last year, and it will support recovery only this year.

Real GDP growth through 2023 is forecast to remain below the historical average due to a slowdown in construction and associated sectors.

Qatar gas
The Ras Laffan Industrial City, Qatar’s principal site for production of liquefied natural gas and gas-to-liquid, administrated by Qatar Petroleum, some 80km north of capital Doha. Image Credit: AFP

Since Qatar mostly exports natural gas, it is less impacted by the OPEC+ oil production cut deal. Moreover, Qatar’s lower fiscal breakeven oil prices ($57/b in 2020) and its large public foreign assets provide substantial fiscal space.

Its non-resident capital inflows remained robust. In April 2020, Qatar issued a $10 billion Eurobond for the third year in a row in the face of heavy investor interest. Qatar continues to lay the groundwork to expand LNG export capacity by 40 per cent in five years and maintain its position among the world leaders.

How gas reserves power Qatar
■ Qatar is home to around 14 per cent of natural gas deposits in the world. Its reserves are the third-largest behind Russia and Iran.
■ In 2011, its gas reserves were around 896 trillion cubic feet (25.4 trillion cubic metres), according to the Oil & Gas Journal.
■ In 2006, Qatar’s gas shipments surpassed Indonesia, making the country the largest exporter of LNG (Liquified Natural Gas) in the world.