ME Economies Hit Hard by Double Whammy: Low Trade Volumes, Low Oil Prices

Published January 6th, 2021 - 12:30 GMT
ME Economies Hit Hard by Double Whammy: Low Trade Volumes, Low Oil Prices
While prices have since recovered to around $50, partly on the back of a historic production cut agreement from oil-producing nations, the fall has nevertheless had a significant impact on major oil-producing nations in the region. (Shutterstock)
Highlights
While circumstances have been challenging, the region has looked to digital innovation as a path to recovery, and a number of governments have accelerated their existing plans for economic diversification.
Facing the twin challenges of a sharp reduction in trade and a steep drop in the price of oil as a result of Covid-19, countries in the Middle East have weathered a particularly difficult 2020, according to Oxford Business Group.

While circumstances have been challenging, the region has looked to digital innovation as a path to recovery, and a number of governments have accelerated their existing plans for economic diversification.

As a region in which a number of countries derive significant proportions of their GDP from hydrocarbons, the Middle East was particularly vulnerable to the immediate effects of the pandemic.

Global efforts to contain the virus – which included severely restricting, and in some cases prohibiting, transport and cross-border travel – ultimately led to a sharp reduction in demand for oil.

This fall in demand, exacerbated by a price war between Russia and Saudi Arabia in the first half of the year, resulted in the price of oil falling from year-opening values of $66 per barrel to less than $20 in late April.

While prices have since recovered to around $50, partly on the back of a historic production cut agreement from oil-producing nations, the fall has nevertheless had a significant impact on major oil-producing nations in the region.

For example, both Saudi Arabia and Oman derive around 75% of export revenue from oil and gas, while the sector contributes an estimated 45% to Kuwait’s GDP.

Although this focus on energy made these countries particularly vulnerable to a fall in revenue, their strong foreign currency (forex) reserves – largely the fruit of strong hydrocarbons earnings in the past – helped bolster their resilience.

For example, in January 2020, just prior to the pandemic, Saudi Arabia had the fifth-highest forex reserves in the world, at $501.8bn, and relatively low public debt, at 22.8% of GDP.

The UAE was similarly well insulated, entering the crisis with record forex, at $110bn, and low debt – equivalent to around 20% of GDP.

Infrastructure resilience Aside from economic pressures, countries in the region had varying levels of resilience when it came to handling the health challenges posed by the pandemic.

Recent investment in the health care systems helped many countries cope with increased pressure as infections spread.

Saudi Arabia recorded a compound annual growth rate of 21% in its health care budget between 2010 and 2019, with the number of hospitals and hospital beds increasing by 9.1% and 10.7%, respectively, during 2014-18.

In contrast, lower-income and conflict-affected nations in the region, such as Yemen, Syria and Iraq, had less developed health infrastructure, leaving them more vulnerable.

Meanwhile, in Lebanon the August 4 explosion in the Port of Beirut destroyed half of the city’s medical centres and left three of its hospitals “non-functional”, according to the World Health Organisation, placing significant strain on the health care system.

Despite these challenges, most countries in the Middle East benefitted from their favourable demographic profiles. With a large proportion of their populations below 30 years of age, they benefitted from a relatively small number of people in high-risk groups.
Elsewhere, another factor that helped build resilience was the state of ICT networks.

Once again, technologically advanced nations such as Saudi Arabia, the UAE and Qatar had stronger digital infrastructure, which allowed them to adapt more easily to the shift towards digital payments, online health initiatives and remote-working practices.

To limit the spread of the virus, governments in the Gulf implemented a series of restrictions on businesses and movement throughout March and April.

While these strategies varied from country to country, they usually included the closure of businesses deemed non-essential, along with curfews and lockdowns.

Some countries acted before widespread infections, with Saudi Arabia banning pilgrimages to Makkah and Medina, as well as preventing access to specific religious sites in the cities, from as early as February.

Others implemented strict penalties for non-compliance with social -distancing guidelines, with those found to have broken the rules subject to heavy fines and even prison sentences in Jordan, Saudi Arabia and the UAE.

Accompanying the restrictions were significant testing and containment measures. The UAE was a world leader for testing in the early stages of the pandemic, pioneering a drive-through testing centre as early as April. Meanwhile, Bahrain received international recognition for its so-called war room initiative, which consisted of a stringent screening and testing centre for citizens returning to the country.

Such measures had varying degrees of success throughout the region. For example, Iran has been badly affected by the virus, with 1.1m cases and 53,000 deaths as of mid-December.

While there has been a substantial number of infections in other Middle Eastern countries, such as Saudi Arabia (360,000), the UAE (187,000), Kuwait (147,000) and Qatar (141,000), they have, on the whole, experienced a low number of deaths, especially when compared to other continents.

As of December 16, virus-related fatalities stood at 6070 in Saudi Arabia, 913 in Kuwait, 622 in the UAE and 241 in Qatar.
Institutional response In addition to the medical response, governments in the region passed significant financial stimulus packages to help offset the economic fallout of the pandemic.

This was the case in Bahrain, where the government launched a BH4.3bn ($11.4bn) stimulus, equivalent to around 30% of GDP, in mid-March.

In addition to increasing liquidity support funds and loan facilities from the central bank, the package paid the salaries of all private-sector employees, along with the electricity and water bills of citizens and businesses, for three months. Certain bills and tax payments were also deferred.
 

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