Introduction 

COVID-19 is leaving a lasting impact on the global economy. While many countries around the world are facing the dilemma of saving lives by effectively stopping their economies, the problems faced by GCC oil producers has yet another facet: turbulence in the energy markets. The combination of these two unfavourable developments is likely to test the resilience of the economies of this region.

Similarly to other regions of the world, Middle Eastern countries have introduced several fiscal and monetary policy measures to uplift their reeling economies. However, despite these measures, the IMF projects the regional economy in the GCC to contract by an average of 3.1% in 2020 as a result of demand and supply-side shocks, effectively removing $425 billion from their economic output. In this analysis, we will seek to go beyond these numbers and discuss why the GCC region is not on firm footing in comparison to other emerging nations. 

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The outlook for the energy market paints a pessimistic view for the regional economy 

Leading GCC economies such as the Kingdom of Saudi Arabia, the United Arab Emirates, and Bahrain have been on a mission to reduce their exposure to and reliance on the energy market over the last few years. For example, Saudi’s Vision2030 was launched in 2016 in a bid to reduce the country’s dependence on oil.

Similarly, the UAE has long focused on non-oil related business activities such as real estate and financial services to drive its economic growth. However, even after all these measures, the region’s fortunes are still largely tied to the fate of the global oil market. As the below chart illustrates, commendable progress has been made in the last decade or so but oil still accounts for more than 30% of GDP in many countries in the region. 

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According to data from the U.S. Energy Information Administration, a barrel of WTI crude oil will average approximately $36 in 2020, whereas a barrel of Brent crude is expected to trade at an average price of around $39. These numbers are much better than the negative prices temporarily seen 20th April 2020 but are still not good enough to help GCC countries break even in terms of their respective current account balances. Even low-cost producers such as the Kingdom of Saudi Arabia and the UAE are likely to experience current account deficits as a result of low oil prices. 

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Even though business activities are returning to their normal state in many industrialised countries – the United States, India, China, and Germany, for instance – progress is slow and it will likely take until at least the fourth quarter of this year for demand to gain meaningful traction. A second wave of the pandemic is also possible, which present yet another risk factor. According to data from Bloomberg, oil storage facilities in Cushing, Oklahoma are still operating at elevated occupancy levels, which is an indication of inventory build-up in the United States and suggests bad times ahead for the global energy markets. As a region that depends on crude oil exports, the GCC will find it difficult to return to the pre-coronavirus level of economic growth anytime this year. 

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The dependency on China will hurt the region 

The trade relationships with China will not come to the rescue of the GCC this time around. In fact, the dependency on China will result in a loss of business and foreign direct investment this year for a number of reasons. 

First, China is one of the largest buyers of crude oil from the GCC. The number of barrels exported to China declined dramatically in conjunction with the two-month-long lockdown in the country that forced manufacturing plants to shut down.