A significant rebound in non-oil sectors is expected in GCC economies by 2021 as lockdown ends and demand recovers. Weaker oil and COVID-19 lockdowns will squeeze GCC’s economic activity and push down 2020 forecasts.
PwC’s Middle East economic watch noted yesterday that despite the Opec+ deals in May and June, the oil price outlook remains weak, with the most recent poll of economists forecasting an average price of just $36/barrel this year, down from $64 in 2019 and only slowly rising to $59 by 2024.
Prior to the crisis, most Middle East states were running deficits even with oil at $64, some of them very sizable, making for a very challenging environment overall.
When it comes to GDP, the IMF’s forecasts see a -4.3 percent contraction in the non-oil sector, nearly 8 percentage points below its pre-crisis forecast of 3.6 percent growth. If the Opec+ cuts are fully applied, then GCC oil production will be about 9 percent less than it was in 2019, which could potentially knock further percentage points off total real GDP, on top of the IMF’s forecasts.
The month of April may have been the low point of the regional recession as the monthly purchasing managers index (PMI) series showed declines to record lows. However, stronger PMI data for May suggests that conditions are improving across most Gulf States.
Although these improvements may relate to the timing lockdowns/ reopening and the survey collection itself, the picture in the region broadly tracks the earlier experience in China, where a solid rebound in the PMI and other indicators followed lockdown easing.
Bassam Hajhamad, Qatar Country Senior Partner, PwC said: “Looking ahead to 2021, there should be a significant rebound in non-oil sectors, as lockdowns end and demand recovers, although oil production will only be slightly higher year-on-year. The biggest uncertainty for 2021 is the oil price. The consensus forecast of $46 would be an improvement but still far below achievable fiscal breakeven levels for most countries. However, a wide range of prices are currently easily conceivable and leading economists forecast a range of $40-60.”
The lower case is easily conceivable if the Opeec+ deal breaks down or there is a second wave of infections and lockdowns, while the higher case is also plausible if an effective coronavirus vaccine leads to a V-shaped recovery in global oil demand. “Although the oil market has always been volatile, it is unusual to see such a wide range in forecasts.
This uncertainty makes planning very difficult for both governments and for companies that are heavily driven by government spending. It also impacts the non-oil exports in the region, such as Jordan and Lebanon, whose economies are heavily influenced by trade, tourism and remittances from the Gulf,” Hajhmad said.
The PwC analysts noted that alongside the monetary announcements and cash flow measures by states to help offset the impact of the crisis, governments have rolled out a wide range of fiscal policies, including stimulus to bolster the economy and consolidation measures in response to sharp declines in revenue.
These fiscal moves will inevitably have an impact on economic growth, on top of the direct demand shock from the virus and lockdown. Several countries have got ahead of the financing challenge through early issuance.
Qatar, along with two other sovereigns, have together issued $27bn in eurobonds since the start of the crisis and even Bahrain managed to issue $2bn and Oman raised over $0.5bn in local debt.
Some of the earliest measures came from central banks, which announced a raft of stimulus measures focused on facilitating bank lending and easing the burden of loan payments for companies facing a temporary cash crunch, particularly SMEs.
While it is difficult to judge how effective these measures have been, the fact that interbank lending rates have generally fallen back, after an initial spike in March, is one indicator that the monetary response has been somewhat successful.