COVID-19, oil prices : A double whammy for Middle East oil exporters, says IMF

Dubai: The COVID-19 pandemic is significantly affecting oil exporters of the Middle East with nearly all countries in the region affected by the spread of the virus, according to the Regional Economic Outlook of the International Monetary Fund (IMF).

“A plunge in global oil prices is compounding strains on these economies, increasing challenges to combating the virus and preventing lasting economic damage,” said Jihad Azour, Director, Middle East and Central Asia Department, IMF.

Real GDP of oil exporters is projected to contract by 4.2 per cent in 2020. This is a significant downward revision from the 2.1 per cent growth projected in the October 2019 Regional Economic Outlook of the IMF.

Oil price and demand

The decline in global oil demand has been exacerbated by a large increase in oil supply has seen oil prices tumbling by more than 60 per cent since the beginning of this year.

Oil prices at these levels could result in more than $230 billion in lost annual revenue for regional oil exporters, compared with October projections, placing significant strains on fiscal and external balances.

According to the IMF, global financial conditions have tightened sharply despite substantial policy easing by major central banks.

Policy response

Middle East oil exporters have swiftly initiated broad policy actions to save lives, contain the spread of the pandemic, and support hard-hit sectors. Overall, announced fiscal measures average 3.2 per cent of GDP ($44 billion) across countries, and 3.8 per cent of GDP ($30.6 billion) in the GCC. Similarly, liquidity support amounts to about 2 per cent of GDP (or about $41 billion) in the GCC.

“Policy efforts have appropriately focused on mitigation and containment, and targeted support to hard-hit households, sectors, and businesses,” said Azour.

Economic impact

The weak growth outlook of the regional oil exporters reflects the impacts of strong and broad-based containment measures and downward pressures from lower oil production in some countries, according to the IMF.

In GCC countries, growth is projected to contract by 2.7 per cent in 2020. Non-oil activity is expected to be a major drag on the near-term outlook, contracting by 4.3 per cent this year.

The service, retail, hospitality and tourism sectors have been particularly hard hit by the spread of COVID-19 and containment measures, raising challenges for countries such as Bahrain, Qatar, and UAE.

Oil GDP is also expected to slow in 2020, contracting in all countries except for Kuwait, Saudi Arabia, and UAE. Overall, oil GDP is expected to contract by 0.3 per cent, though overall oil production is set to fall further with the latest OPEC+ agreement, underscoring downside risks to oil GDP growth.

Saudi Arabia’s growth is forecast at -2.3 per cent, with non-oil GDP contracting by 4 per cent. In the UAE, real GDP growth is forecast to slip to -3.5 per cent real compared to 1.3 per cent growth recorded last year.

While Qatar’s real GDP is projected to slip to -4.3 per cent in 2020, Oman’s is projected to fall to -2.8 per cent compared to 0.5 per cent last year. Kuwait is relatively better off in terms of growth outlook in the GCC with a projected growth of -1.1 per cent compared to 0.7 per cent in 2019.

Rebound in 2021

Despite the gloomy projections, the IMF has forecast a relatively stronger rebound in the region with the overall real GDP growth 4.7 per cent next year with the UAE, Saudi Arabia and Kuwait bouncing back with 3.3, 2.9 and 3.4 per cent, respectively, in 2021.

While Qatar is projected to grow at 5 per cent next year, Oman is forecast to growth by 3 per cent. This reflects current projections of fading effects from the COVID-19 outbreak, gradual improvement in oil prices, and the benefits from sustained global policy easing.

Fiscal vulnerabilities

Lower growth and the sharp decline in oil prices are putting significant strains on fiscal and external positions in MENA oil exporters. The IMF expects the fiscal deficit for the region is expected to deteriorate from 2.8 per cent of GDP in 2019 to 10 per cent of GDP in 2020, with about two-thirds of this decline (or 4.4 percent of GDP) resulting from crisis related spending and revenue measures. Countries with fiscal buffers (Kuwait, Qatar, Saudi Arabia, UAE) are better placed to accommodate rising deficits than those with limited space.

In the GCC, the current account is projected to shift from a surplus of 5.6 per cent of GDP in 2019 to a deficit of 3.1 percent of GDP this year.

“The combination of weaker fiscal and external balances leaves MENAP oil exporters more vulnerable to downside risks, with limited space to combat the effects of the coronavirus,” said Azour.