ECONOMY

Recovery begins, but long term challenges remain

All countries in the Middle East region showing signs of expansion in Q3 except for Lebanon, according to PwC Middle East Economy Watch 2020 Q3.

THE LATEST EDITION of PwC’s Middle East Economy Watch highlights the economic recovery phase from the COVID19 pandemic in the Middle East and provides an overview of expected long term challenges and their potential solutions.

Economic activity picks up in Q3 as restrictions ease

Q2 2020 witnessed historically low oil prices and the most intense OPEC+ production cuts, exacerbated by the first wave of the COVID19 pandemic in the Middle East. Economic activity however, picked up in Q3 with leading economic performance indicators showing signs of recovery. Purchase Managers Indices, which were in the contraction zone for the entire region in Q2, are showing expansion for most months since July. Another encouraging sign for the economy was mobility data from Q3 that uses mobile phone GPS location to show the frequency of visits to different locations including workplaces and shopping centres. By November, most countries were showing a marked recovery in mobility, although still about a 20%25% below the baseline.

The PMI, mobility and point of sales data, along with more anecdotal accounts of activity, suggest that strong rebounds will show up in Q3 GDP data. Some sectors, like manufacturing and trade, will have likely recovered more strongly than tourism.

Government stimulus spending continues, including support for privatesector salaries and tax deferrals, with Central banks in the UAE and Saudi Arabia announcing rolling over stimulus packages to 2021 to support the economy.

Challenging outlook and rising debt level

The economic recovery from COVID19 will be just as challenging as the health response, and even more drawn out, as it could take two years for the GCC economies

Some sectors, like manufacturing and trade, will have likely recovered more strongly than tourism.

to recover to preCOVID levels.

After a historic shock of oil demand in Q2 along with a yoy decline of 9% on average in 2020, forecasts predict a prolonged impact on oil demand.

On the positive side, oil producers in the Middle East, and particularly in the Gulf, have among the lowest dollar and carbon costs of production and so should be able to find a market even in a world of declining oil demand. It is even possible that prices might rise later in the decade if the current underinvestment in new capacity causes supply to decline even more quickly than demand.

One of the lasting impacts of the

Real GDP for GCC countries set for growth and recovery in 2021.

pandemic will be on the sovereign balance sheets. The IMF expects regional debt (excluding Lebanon, which went into default in April) to increase by 64% by 2025 to US$1.5tn. The most dramatic increase will be in Kuwait, going from just 12% of GDP in 2019 to 91% in 2025. Saudi Arabia and the UAE are expected to witness a slight increase in the debt to GDP ratios from 2020 due to higher buffers and fiscal consolidation.

Richard Boxshall, senior economist at PwC Middle East, said, “Q3 2020 has definitely shown signs of recovery for the economy. This has mainly been due to better measures in place to combat the pandemic and continuous adaptation by governments and businesses to the ‘new normal.’ And while uncertainty about the economic situation of the postpandemic world persists, the region is much better prepared to manage COVID19 next year than this, so we should look forward to a period of economic growth and recovery in 2021.” ■