COVID-19 fallout less severe on diversified Arab economies, especially UAE, Saudi

The fallout of the Covid-mandated lockdown will be less severe in diversified Arab economies, in particular the UAE and Saudi Arabia, with both countries likely to have a smaller contraction in 2020 followed by a moderate recovery in 2021, a new research report has revealed.

The research report, published by Trends Research & Advisory, said the coronavirus outbreak is expected to be severe for the oil-exporting countries, especially the less-diversified ones, such as Algeria and Iraq.

"The loss of oil revenues, the reversal of capital flows, the negative impact on workers' remittances, the slowdown of the world economy and the collapse of activities like tourism and international trade are all possible sources of weaknesses for the majority of the Arab economies during the short term and possibly the medium term," said the report.

The World Bank has said the UAE's immediate challenge is to mitigate the economic fallout from the pandemic, "given its impact on sectors into which the Emirates had successfully diversified [through flight disruption, lower transit trade and tourism]".

"Despite being relatively diversified compared to its GCC neighbours, the UAE remains dependent on regional oil-driven liquidity and is thus also vulnerable to the crash in oil prices," the World Bank said.

The Trends report said for countries in the Mena region, the government deficit is expected to rise from an average of -3.4 per cent of GDP in 2019 to -10.7 per cent of GDP in 2020 and that a major reason for the deteriorated government balance is the major drop in global oil prices.

"These negative fallouts could be reversed in the short to medium term if the global fight against the spread of Covid-19 started to reap fruits soon, but the recovery and the restoration of internal and external imbalances could take a long time if the pandemic persists and/or resurge again in the near future," said the report.

However, Fitch Ratings has projected a grimmer scenario, saying the Opec+ agreement to cut oil output and the additional production cuts announced by Saudi Arabia, the UAE and Kuwait would push GCC countries' budgets even deeper into deficit amid the collapse in oil prices.

"In the higher-rated GCC sovereigns [the UAE and Saudi Arabia], large wealth funds and central bank reserves and manageable government debt levels will stave off pressure on external funding and on exchange rate pegs. In lower-rated Oman and Bahrain, (further) support from the rest of the GCC may be necessary," said Fitch.

"We now expect most GCC sovereigns to post fiscal deficits of 15 per cent-25 per cent of GDP in 2020. This assumes an average Brent oil price of $35 per barrel and full compliance of the GCC with the Opec+ deal to limit production, resulting in significant declines in oil output."

"A further $10-a-barrel decline in average prices would increase deficits by 4-6 per cent of GDP [Kuwait being an outlier with an impact of nine per cent of GDP]. A 5 per cent cut to oil production would widen fiscal deficits by 1-2 per cent of GDP, Fitch said.