Could COVID-19 Cause Long-Term Economic Damage in MENA Region?

Published March 15th, 2020 - 12:51 GMT
Could COVID-19 Cause Long-Term Economic Damage in MENA Region?
The COVID-19 crisis will end and China is signalling that the infection had peaked and a plateau in the virus diffusion rate has occurred. The economic negative side effects are going to survive the infection. (Shutterstock)
The COVID-19 is a black swan event: Highly unlikely yet carrying extremely disruptive consequences.

Unlike the European Union and the Association of South-east Asian Nations, Africa has been partially affected by the COVID-19 outbreak. With Egypt confirming the first case in Africa, the spread of the virus in the Middle East and North Africa region is far more serious.

While MENA and the rest of the world scramble to contain the infection, it is doubtful that any country other than China has the political will, capability and civil authority required to quarantine more than 50 million citizens. While Gulf countries have reported isolated cases, Iran is suffering one of the deadliest outbreaks outside China.

From the local outbreak epicentre in Qom, home of hundreds of Chinese students and even more Chinese workers, the infection toll is growing rapidly and the peak has not been reached. The outbreak in Iran ignited border closings with neighbouring countries, especially considering that Qom is a popular destination for Kuwaiti and Iraqi Shia pilgrims.

The COVID-19 is a black swan event: Highly unlikely yet carrying extremely disruptive consequences.

Despite the fact that overall infection rates in MENA are minimal compared with other countries, the long-term economic effects of COVID-19 are going to seriously affect regional growth.

Negative spillovers could endanger economic stability in North Africa and Iran where economies are struggling to stay afloat and aggravate situations such as new migration waves and social stability.

Even in the short term, negative economic effects of the virus are emerging. The long-term effects of the event are difficult to predict. In addition, using models based on the economic and financial effects of SARS could be misleading.

Despite being more lethal than COVID-19, SARS affected a smaller number of people. Also, during 2002-03 the Chinese economic system was less connected with the rest of the world and the country was in the middle of an economic growth cycle.

This time, China’s economy is not shielded by years of rising GDP. China’s role in the global economy is more marked, rising from 4% of the global GDP in 2003 to 16.3% in 2019, the International Monetary Fund said. In 2018, the value of the global tourism sector was estimated at about $1.7 trillion, approximately 2% of total global GDP.

The China Outbound Tourism Research Institute estimates that in 2019 more than 130 million Chinese travelled abroad. Prior to the virus outbreak, the Chinese “New Normal’’ growth model was already experiencing a downturn. After the outbreak, the predicted fall of China’s GDP from 6.5% to 4.5% indicates that an economic crisis is brewing and not just for Beijing.

At the end of SARS, the World Health Organisation confirmed that the negative economic effects of the outbreak had been considerable without considering the direct costs of intensive medical care. During that time businesses, particularly in tourism-related areas, collapsed and the retail sector was also hit hard. This time, focusing on tourist and retail sectors is not sufficient. As the world becomes more integrated, the global cost of COVID-19 can be expected to surpass the one related to SARS.

Economic and financial forecasts will have to consider OPEC’s and Russia’s response to the fall in demand for oil and gas as well as the rise of unemployment and interest rates. Since the COVID-19 virus broke out, stock markets have been hit by rising fears as well as uncontrolled and unverifiable social media narratives. Crude oil prices continue to drop amid demand concerns with a parallel rise in gold futures’ price, a safer asset in uncertain times.

The United States is aiming to decouple its industrial supply chain and trade sectors from China, ostensibly because of national security concerns, and the rest of the world is pointing fingers at Beijing regarding the way the crisis has been handled. Nevertheless, there is a common behavioural fault that needs to be addressed: The diffused perception that China’s economy will always rise.

At least the dismal science is quite clear on one rule, the economy is cyclical. While everybody takes China’s growth for granted, it is not carved in stone that the Belt and Road Initiative’s promises of cheap Chinese capital and the construction of Chinese-made infrastructure are going to proceed as planned. China’s GDP growth has been almost frozen for two months and has only recently begun to return to normal.

In the Middle East, Iran is suffering the first blow from the COVID-19-induced economic crisis but even the oil-rich Gulf countries are bracing for impact. In Tehran, the fall in hydrocarbons prices, the current limitations on trade with Iraq and a dwindling economic lifeline from China, compounded with the US-led sanctions, are a recipe for disaster. The Islamic Republic will survive but at what cost?

Starting with Iran and moving to other MENA countries, hospitals are generally poorly equipped and, in many cases, have reached a breaking point. In addition, hospitals and clinics lack equipment and medicine while medical teams are near to exhaustion.

The COVID-19 is a call for each country and the World Health Organisation to support and improve health sector capacity and capability as the spread of the virus will affect more areas with unexpected contagion vectors. For example, the first case in Nigeria originated in Italy while the first case in Qatar came from Iran.

From Cape Town to Cairo, every economic sector from tourism to fishing has come to a sudden halt almost entirely because of the drop in demand from China. The first tangible economic effect of the virus is related to higher unemployment and an increase in inflation rates.

China’s temporary decoupling from the global economy, forced by the virus and not by US efforts, is going to have repercussions in many countries because of reduced export earnings and higher borrowing costs in the short term, compounded by long-term economic displacement.

Broken global logistics chains are going to move closer to production sites, albeit at a higher cost, or are going to be wiped out of the market because of the sudden halt in demand.

As long as uncertainty reigns, it is possible to predict with confidence that, in the coming weeks, most of China’s resources will be focused on supporting the country’s economic reboot intended to provide a lifeline to private small and mid-size enterprises to stimulate internal consumption.

China’s consumption was under pressure prior to the coronavirus event, with the manufacturing sector under stress and local governments’ bad loans increasing dangerously.

Beijing is going to leverage its financial sector as a cushion to safeguard corporate bankruptcies and to sustain troubled local governments. Planned deals involving Beijing and MENA counterparts are going to be put on hold. The financial markets are already reassessing previously over-optimistic evaluations and replacing them with gloomier outlooks.

The COVID-19 crisis will end and China is signalling that the infection had peaked and a plateau in the virus diffusion rate has occurred. The economic negative side effects are going to survive the infection.

Therefore, only globally coordinated efforts involving multilateral development banks are going to be able to support the MENA region growth and avoid further disruption. The Italian social media’s most common meme during the COVID-19 crisis is related to use of alcoholic beverages to quell the virus, which in the MENA region it is not an option.

Alessandro Arduino

The views/opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.

© 2021-2021 The Arab Weekly. All rights reserved.

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