GCC economic fundamentals are forecast to strengthen in 2021 on the back of a buoyancy in oil prices, but in the long term lower revenues would strain the GCC government spending, economists warned.
The International Monetary Fund said while oil prices recently reached their highest levels since before the pandemic, largely thanks to an Opec cut in supply, in the long-term oil revenues will be lower leading to strained government spending across the GCC.
Tim Callen, assistant director of the Middle East and Central Asia department at the International Monetary Fund, said GCC countries experienced two significant shocks in 2020: the Covid-19 pandemic and disruptions in oil prices.
Speaking during an event on the GCC economic prospects for 2021 hosted by Chatham House in London, Callen said the good news is that some countries have already implemented adjustments. However, he added that this will “require sustained fiscal reforms that look across the gamut of the government wage bill, energy prices in the system, non-oil, tax revenue bases — and not all of the countries have yet introduced a value-added tax, for example.”
Cases of the virus peaked in the region around the middle of the year, in response to which GCC countries implemented stringent lockdowns and imposed travel restrictions. The number of cases began to fall, and lockdowns were eased, which supported the economic recovery in the second half of the year, the IMF noted.
Last week, Jihad Azour, director of the Middle East and Central Asia Department at the IMF, said the road to recovery for the region would hinge on containment measures, access to and distribution of vaccines, the scope of policies to support growth, and measures to mitigate economic scarring from the pandemic.
Monica Malik, chief economist, Abu Dhabi Commercial Bank, said the GCC economic fundamentals are forecast to strengthen in 2021, supported by a higher oil price and as the global economy eventually emerges from the pandemic. “The rollout of vaccines is very positive for the externally facing GCC economies, providing a path to global and regional recovery. Moreover, we expect the GCC’s fiscal and external positions to improve markedly in 2021 with higher hydrocarbon income.”
She estimated the GCC real non-oil GDP activity to expand by 3.2 per cent in 2021, after shrinking by 4.4 per cent in 2020. The forecast growth for 2021 is above the trend level since 2016, albeit reflecting the low base in 2020 due to the pandemic. Indeed, the aggregate headline output gap in the GCC caused by Covid is not expected to fully close until 2022.
“Various Covid-related risks persist, including delays to global vaccine programmes, virus mutations and deepening restrictions in early 2021. These factors are clouding the near-term outlook. We expect the externally facing service sectors to start to recover in a more meaningful and sustained way from 2H2021 as global immunisations reach a critical level,” said Malik.
The ADCB economist expects the three largest GCC economies - Saudi Arabia, the UAE and Qatar - to see the strongest non-oil recoveries in 2021, albeit with variations in drivers.
The UAE’s outlook is linked to the global outlook and containment of the virus. “We see a more fundamental rebound in 2H2021 than in 1H, as the global vaccine rollout will accelerate and hosting the Expo will provide an additional boost for travel and tourism-related areas. firstname.lastname@example.org