MANAMA: Recovery from this year’s recession in the GCC is expected to be slower and more uneven as compared to developed economies, despite the positive news on Covid-19 vaccines, says a new report by one of the largest regional banks.
According to Emirates NBD’s last Monthly Insights publication for 2020, the main reason for a somewhat sluggish regional outlook is that government support during the pandemic was largely focused on liquidity provision through the central banks, rather than direct fiscal stimulus from governments to households and businesses.
In the UAE, direct fiscal measures announced amounted to around 2 per cent of GDP and these measures were largely focused on reducing costs for businesses by slashing fees, reducing rents and cancelling penalties rather than new spending by government or direct support for households to offset lost income.
As per the Emirates NBD analysis released yesterday, preliminary budget data show that government current spending in the UAE and Saudi Arabia declined year-on-year (YoY) in Q2-2020 and H1-2020.
Saudi Arabia’s cumulative spending in the year to September was 3.4pc lower than in the same period in 2019.
In contrast, US government’s spending rose 50pc YoY in Q2 2020, says the report.
“We recognise that governments in the oil producing GCC were constrained in their ability to provide additional fiscal support by the sharp decline in oil revenues as a result of the pandemic, and the fact that there is largely a ‘tax-free’ regime in place which makes it a very different model to most other economies where government revenue is largely derived from taxes,” said Emirates NBD head of research and chief economist Khatija Haque.
“Nevertheless, the result is that many private sector businesses have restructured and reduced staffing levels, while households have been more cautious in spending even as economies re-opened over the summer.”
Looking ahead, with only a modest rebound in oil prices expected in 2021 – the bank expects Brent oil to average $50/b in 2021, well below the budget break-even price in GCC countries – most governments in the region will likely prioritise deficit reduction over growth next year.
Saudi Arabia has already hiked VAT to 15pc from 5pc previously, and increased customs duties on a range of goods, including food items.
This has led to inflation accelerating to 6.1pc YoY in July when the tax increases came into effect, before easing to 5.8pc in October.
“We expect inflation to continue to fall back as the one-off tax hikes are now in the base, but higher prices will likely continue to weigh on household consumption and private sector investment in the coming months,” added Ms Haque. The Emirates NBD report has forecast a decline of 5pc in Bahrain’s GDP down to $35.9bn this year from $38.6bn last year, with growth returning next year leading to a 3.2pc jump to $38.4bn.
Bahrain will likely also need to do more to bring the budget deficit down from an estimated 11.1pc GDP this year, the report adds.
The economist explained that in the absence of more aggressive fiscal stimulus, the region’s recovery will to a large extent be driven by the improving external environment, with a recovery in global trade and travel likely to be a key driver for the UAE in particular.
“This in turn depends on how quickly the new Covid-19 vaccines can be produced at scale, delivered and administered around the world,” she added.
avinash@gdn.com.bh
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