eco TV Week

Dual economic shock in the Gulf: risks and prospects

5/25/2020

Gulf countries have the financial capacity to face the dual shock of the Covid-19 and the fall in oil revenues. However, risks are mounting on public finance in Oman and Bahrain, and on Dubai economic prospects. Eventually, this crisis could accelerate fiscal reforms.

Pascal DEVAUX

TRANSCRIPT // Dual economic shock in the Gulf: risks and prospects : May 2020

The Gulf countries face a dual economic shock: the economic slowdown linked to lockdown decisions and, above all, to the fall in oil prices. We forecast that oil export revenues will drop by more than 40% in 2020, equivalent to USD 200bn. Non-oil activity should be negative all over the region given the slowdown in construction, the drop in tourism and the decline in domestic demand.

In this context, we focus on three potential sources of risk:

Firstly, the deterioration in public finances with fiscal deficits above 10% of GDP on average in 2020. Nevertheless, risks are manageable given accumulated assets in sovereign wealth funds, and the possibility to issue debt on international markets. Only Bahrain and Oman could face financing difficulties in 2020 and 2021 given very high fiscal deficits (above 15% of GDP), limited public assets and costly access to international debt capital markets.

Secondly, the peg with the USD is not at risk. Even for Oman, an abandon of the peg is not likely, but a move in the parity is a possibility.

Thirdly, the emirate of Dubai concentrates numerous vulnerabilities as activity is mainly driven by tourism, real-estate and transportation, especially aviation. The looming economic crisis is likely to accelerate this year and next year.

In terms of prospects, a positive consequence of the current crisis could be an acceleration in fiscal reforms to reduce oil dependency. We see Saudi Arabia going this way with the increase in the VAT rate from 5% to 15%. Nevertheless, we have to remain cautious with this prospect as fiscal reforms in the Gulf have often been disappointing in the past.

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