ICAEW: COVID-19 pandemic brings Middle East economies to temporary standstill
The Middle East economy will see a sharp slowdown in the first half of 2020, picking up later in the year
The Middle East economy will see a sharp slowdown in the first half of 2020, despite stimulus packages and monetary rate cuts to soften the economic blow of the coronavirus outbreak. According to ICAEW’s latest Economic Update, the Middle East economy is expected to see a pickup in the second half of 2020, when both demand and supply-side disruptions fade. This should see GDP growth of 1.0%, an increase from the 0.2% growth in 2019 – however, still down from previously forecasted figures.
Economic Update: Middle East Q1 2020, produced in partnership by ICAEW and Oxford Economics, reports that higher oil production in Saudi Arabia and the UAE will boost the GCC's GDP growth to 2.6% this year. However, the steep decline in oil prices will lead to fiscal adjustments to contain budgetary deficits – dragging down non-oil economies, reinforcing headwinds from the coronavirus and escalating pressure on diversification efforts. This will, in turn, lead to growth in GCC non-oil activity grinding to a halt in 2020.
According to the report, the impact of the coronavirus sent shockwaves across the oil market, driving oil prices down. However, contrary to expectations of further supply cuts, Saudi Arabia and Russia announced their decision to hike oil production as the OPEC+ alliance faltered on 5 March. This move worsened the supply glut, as demand for oil had already weakened substantially and saw Brent crude prices tumbling further to below $30per barrel. The report says that Brent is set to average at $38.5/b in 2020 – 40% lower than 2019 – and increase to $46/b in 2021.
The region has employed similar measures to the rest of the world to contain the spread of the coronavirus, with varying severity of restrictions. Current limitations include travel bans, closure of most public venues; including schools, and a halt to some industrial activities.
Mindful of the impact of the isolation and semi-shutdown of the economy, regional authorities have followed the lead of other countries and taken steps to support demand. For example, Gulf central banks, whose currencies are pegged to the US dollar (with the exception of Kuwait) have slashed the cost of borrowing. Conventional monetary policy easing is being combined with stimulus packages to minimise the damage caused by the coronavirus outbreak. Measures include additional liquidity, custom duty exemptions, rent relief, loan deferment, lower utility charges and credit guarantees for SMEs.
Despite such measures, countries like the UAE and Bahrain, where travel and tourism have become a mainstay of the non-oil economy, are facing a recession in their non-oil economies. With supply chains facing disruption, travel restricted, and events cancelled due to the virus outbreak, this will weigh on the performance of the broader economy.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “2020 is certainly going to be a challenging year for economies, both globally and regionally, due to the COVID-19 pandemic and the unprecedented national response efforts countries are having to implement. Although we are pleased to see Middle East governments put in place the necessary fiscal reforms to soften the economic blow of the virus, growth prospects have deteriorated significantly.
“The continued uncertainty in the global oil market has put more pressure than ever before on Middle East economies that are heavily reliant on oil to increase their non-oil revenues. This is a most challenging task in these times, but governments in the region must remain proactive and continue to support their economies with pro-growth initiatives in order for them to bounce back quickly.”
Elsewhere in the region, growth is also expected to contract this year. Economic conditions have deteriorated in Iran following additional US sanctions in January. And with the region’s worst coronavirus outbreak exerting further pressure on its vulnerable economy, Iran is likely to experience its third year of recession in 2020. However, no official economic data has been disclosed since 2018.
In Q4 2019, Lebanon’s economic downturn worsened significantly amid disruption to business from protests, informal capital controls and the emergence of a parallel currency market. The economy shrank by an estimated 3% in 2019 overall. The forecast for 2020 is for significant contraction of around 9%.
According to the Economic Update report, inflation spiked in both Iran and Lebanon against the backdrop of currency devaluation and will reach double digits in 2020 and 2021. Iraq, the least diversified economy in the region, will also be under pressure amid low oil prices.