Progress on a Covid-19 vaccine bodes well for the easing of restrictions and an improvement to Middle East GDP forecasts in the second half of 2021, a new report has said.
Economic Update: Middle East Q4 2020, from Oxford Economics and commissioned by chartered accountancy body ICAEW, reports that economic recovery is slowly underway in the Middle East but won’t return to pre-crisis level until 2022. GDP forecasts for the Middle East for this year and next stand at -6.8% and +2.9%, compared to an average pace of 2.6% between 2010 and 2019.
As a second wave of the Covid-19 pandemic takes hold in Europe and other parts of the world, global recovery has stalled. While containment measures for the virus are being re-imposed in many economies, economic recovery for the Middle East has lost momentum, despite a strong bounce back in the third quarter of this year.
With infections largely in check, GCC countries have continued to ease out of lockdowns. While clearly positive, Google mobility trends show the pace of return to normality has slowed, particularly in the important workplace category, and tourism traffic has also been subdued.
The oil sector remains a drag on overall growth as countries cut production in line with the OPEC+ April deal. Therefore, with both oil and non-oil sectors facing hurdles, the GCC is set for a large GDP contraction of 5.3% this year, before recovering by 2.4% in 2021, the report says.
While high OPEC+ compliance with the current deal continues to offer support to oil prices, they are still down by over 26% from their levels in January. The group agreed to an increased output of almost 0.5mb/day from January 2021 and will review the process on a monthly basis to sustain drawdown in inventory levels.
In its latest Economic Update, ICAEW’s estimate for Brent crude is $41.7per barrel for this year and $49.3pb in 2021, slightly higher than forecasted figures back in March. However, there is limited upside for oil prices through 2022 and 2023.
The subdued outlook for oil prices will limit GCC governments’ room to provide fiscal support, preventing growth from returning to the levels they were at the end of 2019 before late 2022, later than most other regions in the world, the report says.
Regional fiscal buffers were already weakened heading into the dual oil and Covid shock, apart from in UAE and Qatar, and budgets have come under further pressure this year amid loss of the dominant oil and gas revenue. Several governments, including Oman and Saudi Arabia, look eager to repair their finances by implying more restrictive fiscal policies in 2021-2022. This will weigh on demand and keep inflation low. But other governments are well positioned to capitalise on lower borrowing costs to fuel recovery even if oil prices stay lower for longer – the UAE getting its first federal credit rating may be an indication of an upcoming issuance.
In the non-oil economy, recent vaccine developments boost the chances of consumer-facing sectors, such as hospitality and airlines, being viable in a year’s time. This should benefit regional countries with a higher share of tourism, mainly the UAE and Bahrain, where non-oil economies have struggled to pick up pace and companies have continued to trim their workforces. The burden of job losses has fallen on the expat population, leading to a departure of many workers and a decline in population.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “2020 has been a challenging year for Middle Eastern economies. The dual shock of the Covid-19 pandemic, paired with continued uncertainty in the global oil market has meant that, in 2020, the Middle East economy is experiencing its lowest growth in decades. While the Covid-19 vaccine rollout is underway, the Middle East governments must ramp up their economic diversification efforts by developing sectors and industries that generate net value for the economy and fostering innovation.”
Elsewhere in the region, the outlook remains weak, with Iran and Lebanon both thrust into renewed lockdowns. Inflation has spiked in both countries against the backdrop of currency devaluation and is predicted to be in double digits this year and next.
“Joe Biden’s victory in the 2020 United States presidential election has not changed our near-term assessment of the economic outlook, as his administration will uphold relations with traditional allies. But his win will likely yield a more balanced approach to the regional rivalries and a softer stance on Iran,” Armstrong added.
In Lebanon, an explosion in the country’s key port has reinforced the downturn, with GDP seen falling by about 25% this year and further in 2021, as the currency and financial crises reverberate through the economy. It will likely take the country 15 years to regain its 2019 GDP level.
Iraq, the least diversified economy in the region, will see the largest GDP fall among OPEC members. The pandemic has also compounded economic stress from US sanctions in Iran, which has encouraged panic buying of foreign currencies on the open market, the report says. - TradeArabia News Service