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Khatija Haque - Head of Research & Chief Economist
Published Date: 13 January 2021
GCC countries faced a double whammy of sharply lower than expected oil revenue in 2020 in addition to the impact of the coronavirus on the non-oil sectors. We estimate the region’s real GDP – weighted by nominal GDP – contracted by -5.1% in 2020. Across the GCC, transport, logistics, tourism and retail trade were the most affected sectors. This was particularly evident in the UAE and Bahrain, the most diversified and open economies in the region. The IMF estimates that the volume of global trade contracted by around 10% in 2020, while international air passenger traffic declined by 90% at the peak of border closures in Q2 last year, according to data by IATA.
*GCC averages are weighted by nominal GDP
Source: Haver Analytics, Emirates NBD Research
Wider budget deficits in the GCC as a result of both lower oil prices and production limited the scope for additional fiscal stimulus in most of the region. Saudi Arabia, Oman and Kuwait announced measures to tighten fiscal policy last year even as their non-oil sectors contracted. While some targeted fiscal support measures were announced in Q2, these were largely around reducing fees and delaying tax collection, with some subsidies increased and wage support for nationals working in the private sector. The main policy focus in the region was on ensuring sufficient liquidity to the banking system, which in turn allowed banks to provide relief for borrowers affected by the pandemic. We saw monetary supply growth rise across the GCC, as it did in many other economies around the world, reflecting this increased liquidity.
Nevertheless, domestic demand was affected by the lockdowns in Q2, salary cuts and redundancies across the private sector. PMI survey data in the UAE and Saudi Arabia show declines in private sector employment in 2020, and even where activity had started to recover in Q4, this had not led to an increase in jobs except in Qatar. Redundancies and pay cuts likely weighed on private consumption last year, particularly in the UAE where an estimated 90% of the population is expatriate and mostly employed in the private sector. Understandably given the relatively weak domestic demand, firms in the UAE have been more cautious in their outlook for 2021 compared with private sector firms in Saudi Arabia, and this has likely weighed on investment as well, as their priority appears to be reducing costs.
Source: IHS Markit, Emirates NBD Research
There are reasons for optimism about the outlook for 2021 however, despite the surge in coronavirus cases around the world in recent weeks. The rollout of several Covid-19 vaccines has begun which should allow restrictions on activity and movement to be eased by the end of Q1 in most developed economies. Additional fiscal stimulus in the US now looks more likely in the coming months as the Democratic Party has taken a slim majority in the Senate in January after winning the White House and retaining their majority in the House of Representatives in November 2020; and a late trade deal between the UK and EU has led to a relatively smooth Brexit. All of this should help to spur global growth from Q2 2021.
For the GCC, this improvement in the global growth outlook together with a weaker US dollar, record low interest rates and firmer oil prices in 2021 should support the domestic recovery. The Federal Reserve is expected to keep the Fed Funds rate unchanged until 2023, anchoring low borrowing costs in the GCC. The recent decision by OPEC to reduce oil production until the end of March should support oil prices in the near term even as demand is likely to be softer in Q1 on the back of extended lockdowns in many countries. Emirates NBD expects Brent oil prices to average USD 50 per barrel in 2021, around 16% higher than last year.
While the extent of direct fiscal stimulus in the region will likely remain lower compared to many other countries, there have been a number of structural reforms announced in 2020 that should start to yield some benefit in 2021. There is also scope for increased government spending in the UAE, given its relatively strong balance sheet and in Saudi Arabia, increased domestic investment by the Public Investment Fund will help to offset cuts to capital spending in the budget. Overall we expect real GDP growth in the GCC, on a nominal GDP-weighted basis, to recover 2.3% in 2021, which would be the fastest rate of growth since 2016.
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