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Gulf Countries Suffer Worst Recession In History
The six-member Gulf Cooperation Council will suffer from the worst recession ever in 2020 due to the oil price crash and the coronavirus pandemic, the Institute of International Finance said in a report June 2.
With the price of oil at historic lows, and the pandemic crisis affecting every aspect of their economies, the Gulf States are experiencing the worst recession in their history. Gulf countries will be obliged to make major cuts in public spending in order to compensate for the lost oil revenue.
The economy of the energy-exporting GCC region will shrink 4.4% in 2020, with Oman having the worst contraction of 5.3% among the six countries. GCC countries are Saudi Arabia, Kuwait, UAE, Oman, Qatar and Bahrain. Shocked by COVID-19 and the plunge in oil prices, the six GCC states will experience their worst recession in history.
The economy of the hydrocarbon-exporting Gulf Cooperation Council will shrink 4.4 per cent in 2020, according to a report by the Institute of International Finance released on Monday.
The GCC’s oil economy will contract the most, by 5.3% in 2020 due to the OPEC+ cuts, the IIF said
“Growth could resume in 2021, supported by the partial easing in oil production cuts and gradual pick-up in private sector non-oil activity,” the IIF said.
OPEC+ is currently in the midst of a historic 9.7 million b/d production cut that started in May to help soak up excess supply in the market as coronavirus crippled demand.
“Middle Eastern countries should not “waste” the ongoing coronavirus crisis, but should make changes to build up the resilience of their economies. Bejjani pointed out that the GCC economies are not resilient, far too reliant on hydrocarbons to face crises of this kind.
The period over which the contraction will continue is uncertain, the report says, as is the speed of recovery which could take place in 2021, or even later.
“We expect significant non-oil economic contraction in 2020, which is unprecedented in the GCC,” warns Fitch Ratings. “Growth stayed positive even during the global financial crisis of 2008-2009 (except in Kuwait) and the oil price crash of 2015-2016. Oman is likely to see the deepest contraction, reflecting pre-existing economic weakness and sharp fiscal consolidation.
The countries that compose the GCC council, which include Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman, have since 1998, seen real GDP expand by an annual average of 5.2 per cent and by a cumulative total of 65 per cent, according to the Economist Intelligence Unit.
Meanwhile, the population has risen from just over 28 million in 1998 to an estimated 39 million in 2008. The GCC states will spend $49 billion in 2020 for food imports alone, so the economic contraction will pressure consumers prices as well.
Now the GCC’s oil economy, which is the main economic driver, will contract by 5.3 per cent in 2020 – much of this is due to the OPEC cuts, the report noted.
While the oil sector is expected to remain poor throughout 2021, the much smaller non-oil sectors may recover during that year. OPEC has cut production by 9.7 million barrels per day in an effort to support the price of the commodity.
Saudi Arabia, Kuwait and the UAE are OPEC members, while Oman is a member of the non-OPEC states in 23-member coalition of OPEC+.
Despite the region’s spending cuts, the GCC’s fiscal deficit is forecast to widen to 10.3 per cent of GDP in 2020 from 2.5 per cent in 2019, but this is based on the assumption of oil at about $40 per barrel – the price of oil at this writing is just below that figure.
“Wider fiscal deficits will lead to higher debt and draw-downs of fiscal reserves. In 2020, we expect the GCC funding mix to shift in favour of drawdowns from fiscal reserves.
We expect the GCC to issue around $48 billion in foreign debt this year (of which $30 billion has already been issued), This will be accompanied by around $140 billion in drawdowns from fiscal reserves and wealth funds, compared with only about $10 billion last year,” writes Fitch Ratings.
However, most of the Gulf countries have enough financial firepower to cope with the challenges they now face. In a recent research note, Ahmed Esam, assistant economist at Oxford Economics, said “GCC countries, with the exception of Bahrain due to its affected manufacturing sector, are the most resilient in the MENA region to structural shocks owing to their stronger economic positions. North African countries, as well as Jordan and Lebanon, are the most vulnerable.”
GCC economies have a smaller share of people aged over 65 years compared to other countries in the region, as well as better-equipped healthcare systems to handle outbreaks of the virus.