Economists say that the worst is behind us as recovery gains ground - steadily, albeit at a slow pace - with GCC countries emerging from the deepest part of the contraction due to Covid-19 in the second quarter on the easing of virus containment measures and higher oil prices.
However, the pace of economic recovery will likely be gradual and dampened by the need for tighter fiscal policy, job losses and external weakness. Oil prices remain well below the level needed to balance GCC budgets, and policies have largely shifted towards fiscal consolidation aimed at limiting the size of deficits, said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
During the second quarter, GCC governments announced lockdowns and suspensions of domestic and international flights to curtail the pandemic, with economists forecasting it to be the worst quarter ever in for the region when life came nearly to a standstill. But as regional economies reopen following the decline in new Covid-19 cases, economic activity will pick up in the months ahead and expedite the recovery.
GCC governments announced fiscal support packages to reduce the pressure on corporates and households - including lowering government fees and charges - though these were generally smaller than the overall scale of fiscal tightening across the GCC.
Malik said a clear exception to this trend within the region is Abu Dhabi, reflecting its stronger fiscal buffers and fiscal reforms earlier implemented.
Following a contraction between 6.9 per cent to 4.4 per cent as per ADCB estimates, all regional countries will bounce back strongly next year with up to three per cent growth.
Malik said project awards saw a marked decline in the second quarter but there are some signs of ongoing progress with projects either where governments are looking to provide ongoing economic support (Abu Dhabi) or where funding is in place (Saudi Arabia).
"Given the outlook for fiscal deficits, foreign capital will become even more crucial to making progress with the projects planned to diversify the economy," she added. Malik added that vaccine is essential for a more meaningful recovery in key GCC non-oil sectors such as aviation, tourism and hospitality, among others, alongside higher oil demand.
"We see an overall tightening in fiscal policy across the GCC in response to the sharp fall in hydrocarbon prices and limited fiscal space," Malik said, adding that "our non-oil GDP growth forecast for 2021 takes into account that most GCC governments will have limited room to provide any meaningful and steady fiscal stimulus. This is based on our Brent crude forecast of $43.8 per barrel in 2020."
For the more diversified economies in the GCC like the UAE, Malik said overseas demand recovery will be essential, especially key non-oil sectors including tourism and hospitality, aviation, trade and logistics. "We also expect to see downward pressure on real estate prices in the UAE given weaker international interest, adding to the pressures from the expected decline in population," she added.
She noted that the decline in the GCC expat population could potentially take years to fully recover to pre-crisis levels.
Vipul Kapur, head of private banking at Mashreq Bank, said in many ways, the Covid-19 has only accelerated trends that were already under way in the GCC. "Before the crisis, GCC countries rolled out robust blueprints for diversifying their economies, while leveraging their areas of strengths in the energy and petrochemicals sectors. Additionally, member states started focusing on other industries that serve nationwide needs, such as food security, technology and healthcare," Kapur said.
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