MENA Quarterly Q3 2020

At the half-way mark of what has been an extraordinary – and not in a good way – year, we are starting to see some tentative signs of recovery in economic data around the world.  Global PMIs appear to have bottomed, although most remain in contraction territory.  China’s economy recorded growth in Q2, and consumption activity in the major economies has recovered as lockdowns were eased in May.  However, the spike in coronavirus infections in countries that had previously appeared to have contained the pandemic (Australia, Japan) and the surge in infections in the US has led to restrictions being re-imposed in many areas.  High frequency data suggests that this may already be weighing on the recovery in the US. 

In the GCC, the impact of the coronavirus-related disruptions on the economy, particularly to transport, logistics and tourism, has been compounded by the negative impact of sharply lower oil prices and production on budgets resulting in announcements of cuts to spending plans in most countries in the region.  This pro-cyclical tighter fiscal policy is in marked contrast to expansionary fiscal policies in the world’s largest economies, which have provided eye-watering levels of support to businesses and households.  The UAE is the exception in the region however, and while direct fiscal stimulus has been smaller as a percentage of GDP than in developed economies, the UAE is the only country in the GCC where we expect total government spending to rise this year.

We have revised our oil outlook higher for 2020 and now expect Brent prices at an average of USD 42.55/b. However, supply-side factors are likely now well incorporated into the price and demand dynamics will exert a more meaningful influence over the rest of the year. MENA oil exporters will be exposed to changing demand patterns caused by the Covid-19 pandemic.

Several MENA countries have tapped the IMF for support to help mitigate the impact of the pandemic on their economies and balances of payments. These funds have helped to finance emergency spending, tax cuts and furlough schemes to mitigate the impact of unemployment and support domestic demand.  While oil-importing countries will benefit from lower oil prices, the negative impact from the disruption to tourism and trade will weigh on growth and external balances.  

In its latest Regional Economic Outlook (July), the IMF downgraded its forecast for the MENAP region by 3.1pp to -7.3% in 2020, with most of the adjustment due to a weaker outlook for oil exporting countries. We have also downgraded our MENA growth forecasts to take into account the likely sharp economic contraction in Q2, and expect only a modest recovery by year-end and into 2021.  However, the uncertainty around our forecasts remains high, as the global pandemic and policy responses to it continue to evolve.

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