Economic activity in GCC to accelerate in 2021 as commodity demand rises

Economic activity in the Gulf Cooperation Council (GCC) will pick up in 2021 as global demand for commodities increases and as lockdown restrictions due to the pandemic ease further, a report by the US-based credit rating agency, AM Best said.

The six nation GCC, comprising of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, was particularly hard hit by the pandemic as they faced the dual economic shocks of commodity price declines and slowdowns in domestic economic activity.

While the resurgence in global economic activity will contribute to higher commodity prices, and progress in vaccination programs (for most of the GCC) will help fuel domestic demand in 2021, a recent surge in virus cases in the region and elsewhere portends a great deal of risk and uncertainty, the report said.

AM Best, which places countries into one of five “country risk tiers” (CRT), ranging from CRT-1, for countries with a stable environment that poses the least amount of risk, to CRT-5 for those that pose the most risk, said  CRTs for the GCC are concentrated in the CRT-3 and CRT-4 tiers, with Kuwait, Qatar, Saudi Arabia, and the UAE at CRT-3, and Bahrain and Oman at CRT-4.

In 2020, the GCC economies contracted by more than the 3.3 percent world average drop in GDP, except Qatar, the AM Best report said. “To varying degrees, countries in the GCC are vulnerable to external demand conditions, due to their reliance on the energy sector to drive economic growth and provide government revenue. As a result of the pandemic, the GCC countries experienced a dual shock: muted domestic demand and plummeting external demand for energy products.”

The governments in the bloc loosened up their purse strings to mitigate the economic and health consequences of the pandemic. The measures included support for private-sector, suspension/deferral of government tax payments, and additional liquidity to banks and businesses.

This led to government debt in most of the region rising substantially. The IMF expects an increase in the aggregate fiscal deficit in the GCC to 9.2 percent of GDP in 2020, before coming down to 5.7 percent in 2021.

Rising debt has increased the region’s financing needs from an estimated 9 percent of GDP in 2019 to over 13 percent in 2020. To meet these needs, GCC governments issued debt amounting to almost $60 billion through October 2020, well above the previous full-year total of $44 billion in 2019, as estimated by the IMF.

Government stimulus efforts will also contribute to growth in the non-oil sector. Oil sector activity is expected to grow 1.6 percent in 2021 but is somewhat limited by the OPEC oil production agreement to increase production gradually.

“We expect non-oil sector economic activity to outpace that of the oil sector this year. As most countries move towards economic normalcy, sectors such as tourism and travel are expected to show above trend growth—although, given the unpredictability of the virus, this is subject to a degree of uncertainty and downside risk,” AM Best said.

However, by 2022, oil sector activity will likely overtake non-oil sector economic growth, it added.




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