Heavy GDP losses are observed across all MENA country groups. The GDP level in 2021 for developing oil importers is forecast to be 9.3% below the counterfactual GDP level without the pandemic. The counterfactual decline for GCC countries is 7.7% and is 4.4% for developing oil exporters.The sharpest declines in real Government revenues in 2020 were among the GCC and developing oil exporters, not surprising given the oil price collapse.
Significant disruptions related to COVID-19 compounded by sharp fall in oil prices weighed heavily on Bahrain’s economy in 2020. Fiscal and external deficits worsened, reversing the narrowing path observed in 2019. Widespread access to the vaccine, higher oil prices, and commitment to implement policies under the Fiscal Balance Program, particularly those pertaining to tackling budget rigidities and providing fiscal support to the most vulnerable, will improve the outlook. Downside risks arise from further resurgence of COVID-19 outbreaks, volatility in hydrocarbon prices, and delays in fiscal reforms.
The COVID-19 crisis and ensuing oil price slump have highlighted the vulnerability of the country’s over-reliance on oil ex-ports for non-oil growth and fiscal revenues. Even prior to the pandemic, lower oil prices since 2014 have generated sizable fiscal and external imbalances and resulted in large financing needs and borrowing costs. The authorities responded by announcing Fiscal Balance Program (FBP) in 2018 supported by US$10 billion commitment from GCC peers, which aims to achieve a balanced budget by 2022. While fiscal reforms under the FBP helped to narrow the fiscal deficit prior to COVID-19, protracted low oil prices and large off-budgetary spending kept the fiscal deficit over 9% of GDP in 2019.
The outlook for Bahrain’s hinges on the uncertainty related to the pandemic, the effectiveness of the vaccine, evolution of global oil markets and the reforms process. Economic growth is expected to gradually rebound to 3.3% in 2021, under-pinned by the rebound in non-oil activity as rapid rollout of the vaccine will boost the sectors most impacted by the pandemic. Growth is projected to remain modest at an average of 3% over the medium term as fiscal austerity measures will act as a headwind to post-pandemic catch-up.
In the absence of structural reforms, the fiscal deficit is projected to remain sizable at 11% of GDP in 2021 amidst modest recovery in oil prices. In the aftermath of the pandemic, steadfast fiscal reforms and better-targeted subsidies under the FBP, accompanied with development of new oil and gas resources will gradually narrow the fiscal deficit. However, debt to-GDP ratio is expected to increase to over 133% in 2021, and to remain elevated in the forecast period implying still large financing needs. Large current ac-count deficits are likely to persist in 2021-23 albeit at slightly moderated levels thanks of modest oil price gains
Kuwait is still adapting to the twin shocks of COVID-19 and slump in oil prices that hard-hit its economy and fiscal and external positions. As fiscal deficits persist in the medium term, and in the absence of a new debt legislation, drawdowns from sovereign assets will be inevitable, potentially without concomitant reforms. Friction between the executive and legislative branches, delays in vaccination rollout to the entire population, and renewed down-ward pressure on oil prices are all key downside risks to the outlook.
As in other countries, a new wave of the pandemic is an emerging possibility. The 7-day moving average for daily new cases registered a new high in early February (980 cases), after being on a downward trajectory since October 2020. A spike in new cases prompted authorities to renew restrictions in early February. Meanwhile, the national vaccination program rollout started in late December 2020 with the target of inoculating 80% of the population by September 2021—by end- March, only 8.7% of the population received at least a single dose of the vaccine. A boost in prospects has come from oil prices, which recouped some of their lost ground since Spring 2020 owing to effective OPEC+ supply restraint and a pick-up in global economic activity as countries relax containment measures.
The economy is expected to recover with 2.4% growth in 2021, driven by a more accelerated pick up in global energy demand and prices while oil production levels continue to lag, growing only at 0.2%, in agreement with OPEC+ commitment. As the vaccination program gains more momentum and COVID-related restrictions are further eased, non-oil sectors will continue its growth trajectory, estimated to reach 4.4% in 2021 to reflect stronger domestic demand. Over the medium term, growth will recover even further with continued public spending and credit growth, averaging around 3.2%. Inflation is anticipated to pick up as economic activity recovers.
Rapid and well-coordinated measures have limited the spread of COVID-19, but lockdown restrictions weighed heavily on economic activity in 2020. The slump in oil prices and exports have significantly widened fiscal and external deficits and resulted in higher public debt and financing risks. The outlook assumes containing the pan-demic, avoidance of another oil price plunge, and successful implementation of fiscal consolidation plans. Materialization of downside scenarios would heighten external financing pressures.
Overall growth is estimated to have contracted by 6 percent in 2020. This is main-ly driven by more than 9 percent contraction in non-oil GDP as the subsequent lockdown measures weighed heavily on domestic demand where tourism and services sectors have suffered the most. A significant increase in the production of condensates that is not subject to OPEC+ cut deal, has helped the oil sector to adapt to the crisis, at least in volume terms, with oil GDP has seen only 2 percent contraction. Inflation turned negative at -1.0 percent (y/y) in 2020 reflecting weak domestic demand.
Overall growth is projected to post a tepid recovery of 2.5 percent in 2021 supported by the vaccine roll-out and the ease in lock-down restrictions. A backloaded rebound will see growth peak at 6.5 percent in 2022 lifted by rising oil prices, and further development of the hydrocarbon sector, before declining to 4 percent in 2023 in view of fiscal austerity measures. Inflation is projected to pick up to 3 percent in 2021, reflecting the recovery of domestic demand and the April 2021 introduction of VAT, but to decline in the years to come as VAT-driven impact on inflation dissipates.
Qatar entered COVID-19 with a very particular set of circumstances, namely a high specialization in liquefied natural gas exports and very limited inter-action with its immediate neighbors due to a diplomatic rift. These factors somewhat buffered the impact of COVID- 19. The fundamentals for a strong recovery are in place through resilient demand for gas as a transition fuel, an extensive set of business environment reforms, and a tourism sector that was gearing up for 2022, not 2020-21.
Qatar is distinct from other GCC economies in the dominance of natural gas ex-ports, a model in which it has made large investments to bring gas onshore and ex-port it mainly via liquefaction (LNG). As a result, it is the world’s second-largest gas exporter and the largest exporter of LNG. The collapse in crude oil prices at the start of the pandemic reverberated through to LNG markets, especially oil-linked LNG contracts. This persisted for most of 2020 and weakened overall GDP growth
Real GDP growth for 2021 is expected to be 3%, with the same rate of growth for both oil and non-oil GDP, driven by domestic and foreign demand as vaccinations roll out and with the end of the diplomatic rift. Strengthening energy prices and final preparations for the FIFA World Cup 2022, as well as expected bumper tourist receipts from what could be the world’s first post-COVID mass audience sporting event, should lead to 4.1% growth in 2022, with non-oil GDP expected to grow 4.9% (and oil GDP remaining at 3%).
The fiscal deficit is expected to narrow to 2.3% in 2021 following recovery in hydrocarbon prices, the potential intro-duction of VAT in the current year and a general easing of fiscal mitigation as the pandemic unwinds. Like other macroeconomic indicators, the current account in Qatar is largely a function of energy-related commodity prices and export volumes.
After a deep contraction in 2020, Saudi Arabia’s economy is on a recovery path as new COVID-19 cases have stabilized at manageable levels, global conditions improve, and the national vaccination program gains momentum. Improvement in oil prices and easing of containment measures will strengthen medium-term fiscal and external positions. A resurgence of COVID-19 infections and renewed downward pressure on oil prices are key downside risks to the outlook. Further fiscal austerity measures would also act as a headwind to the recovery.
Saudi Arabia has faced a compound challenge of coping directly with the pandemic and with the indirect oil market implications of the pandemic. Daily infections had been on a downward trajectory from its peak in June 2020 (4400 cases) to early January 2021 (100 cases); yet by mid-February new and more transmissible variants of the virus crept up, forcing partial reinstatement of travel bans. Meanwhile, the national vaccination program rollout started in mid- Dec 2020, ahead of many countries in the region, with the aim of inoculating at least 70% of population by end 2021. The vaccination rate, currently standing at 7 doses per 100 people, is increasing rapidly, but still too low to give sizable immunity. On the other hand, the Kingdom has navigated extraordinary volatility in the oil market, using the OPEC+ structure and its own carefully calibrated production adjustments to keep supply in line with the gradual global relaxation of containment measures.
The economy is expected to grow by 2.4% in 2021, driven by a more accelerated pick-up in global energy demand and prices and Saudi oil production level closer to its OPEC+ original commitment, resulting in oil sector growth of 0.5 per-cent. As the vaccination program gains more momentum and COVID-related restrictions are eased, non-oil sectors will continue their growth trajectory, estimated to reach 3.5% in 2021 and reflecting stronger private consumption, gradual resumption of religious tourism, and higher domestic capital spending signaled through PIF’s five-year strategy (2021-2025). Medium-term growth is expected to reach 3.3% while headline inflation in 2021 is expected drop, as VAT-driven impact on inflation dissipates.
United Arab Emirates
COVID-19 and its economic fallout entailed a major shock to the UAE’s open economy. Low oil prices and OPEC+ production cuts hobbled the hydrocarbon sector, the backbone of the economy, while the service-oriented non-hydrocarbon economy was severely affected by disruptions in global trade and travel. The UAE’s near-term eco-nomic prospects depend critically on being positioned to benefit from the recovery of the global economy. The country’s long-run priority is to further diversify the economy and create jobs in the private sector.
COVID-19 and its economic fallout exerted a heavy toll on the UAE’s open economy, leading to a contraction of 4% in the first half of 2020 year on year (y/y). The volume of oil production declined by 4.4% (y/y) in the second quarter of 2020, in line with the OPEC+ production cuts agreement. The non-hydrocarbon sector contracted by 6% for the first half of 2020, as strict lockdown, travel bans, and supply chain disruptions constrained tourism, construction and trade activities. Non-hydrocarbon activity began to show signs of recovery in the third quarter of 2020, with the resumption of international travel, relaxation of lockdowns, and large-scale monetary and fiscal measures.
The economy is expected to rebound in tandem with the recovery of the global economy. The hydrocarbon sector would regain strength with rising global oil prices, helping to restore the fiscal and external positions, and boosting confidence on the overall economy. This, coupled with a sustained recovery of global trade and travel, would allow the non-hydrocarbon sector to rebound. The normalization of relations with Israel and Qatar could expand economic opportunities. But the pandemic could have a lingering impact on global travel, hampering a speedy recovery of the UAE’s large tourism industry.