How will Gulf countries recover from the pandemic?

Facing the twin challenges of a sharp reduction in trade and a steep drop in the price of oil as a result of the Covid-19 pandemic, countries in the Middle East weathered a particularly difficult 2020. While circumstances have been challenging, the region has looked to digital innovation as a path to recovery, and a number of governments have accelerated their existing plans for economic diversification.

Impact on Oil

With a number of Gulf countries deriving significant portions of their GDP from hydrocarbons, the region was particularly vulnerable to the immediate effects of the pandemic. Global efforts to contain the virus – which included severely restricting, and in some cases prohibiting, transport and cross-border travel – ultimately led to a sharp reduction in demand for oil. This fall in demand, exacerbated by a price war between Russia and Saudi Arabia in the first half of the year, resulted in the price of oil falling from year-opening values of $66 per barrel to less than $20 in late April 2020.

While prices recovered to around $67 per barrel in mid-May 2021, partly on the back of a historic production cut agreement, the fall nevertheless had a significant impact on major oil-producing nations in the region. For example, both Saudi Arabia and Oman derive around 75% of their respective export revenue from oil and gas, while the sector contributes an estimated 45% to Kuwait’s GDP. Although this focus on energy made these countries particularly vulnerable to a fall in revenue, their strong foreign currency reserves – largely the fruit of hydrocarbons earnings in the past – helped bolster their resilience.

Regional Resilience

Aside from economic pressures, countries in the region had varying levels of resilience when it came to handling the health challenges posed by the pandemic. Investment in health care systems helped many countries cope with increased pressure. Saudi Arabia recorded a compound annual growth rate of 21% in its health care budget between 2010 and 2019, with the number of hospitals and hospital beds increasing by 9.1% and 10.7%, respectively, between 2014 and 2018.

In contrast, lower-income and conflict-affected nations in the region, such as Yemen, Syria and Iraq, had less developed health infrastructure, leaving them more vulnerable. Meanwhile, in Lebanon the August 4, 2020 explosion at the Port of Beirut destroyed half of the city’s medical centres and left three of its hospitals “non-functional”, according to the World Health Organisation, placing significant strain on the health care system. Despite these challenges, most countries in the region enjoyed advantages stemming from their favourable demographic profiles. With a large portion of their populations below the age of 30, they benefitted from a relatively small number of people in high-risk groups.

The state of countries’ ICT networks also bolstered resilience. Again, technologically advanced nations such as Saudi Arabia, the UAE and Qatar have strong digital infrastructure, which allowed them to adapt more easily to the shift to digital payments, online health initiatives and remote work. To limit the spread of the virus, governments in the Gulf implemented a series of restrictions on businesses and movement throughout March and April 2020. While these strategies varied from country to country, they usually included the closure of businesses deemed non-essential, along with curfews and lockdowns.

Some countries acted before widespread infections: Saudi Arabia banned pilgrimages to Makkah and Medina, as well as prevented access to specific religious sites in the cities, from as early as February 2020. Others implemented strict penalties for non-compliance with social-distancing guidelines, with those found to have broken the rules subject to heavy fines and even prison sentences in Jordan, Saudi Arabia and the UAE. Accompanying the restrictions were significant testing and containment measures. The UAE was a world leader for testing in the early stages of the pandemic, pioneering a drive-through testing centre in April 2020.

Institutional Response

Along with the medical response, governments in the region passed large stimulus packages to help offset the economic fallout of the pandemic. This was the case in Bahrain, where the government launched a BD4.3bn ($11.4bn) stimulus – equivalent to around 30% of GDP – in mid-March 2020. In addition to increasing liquidity support funds and loan facilities from the central bank, the package paid the salaries of all private sector employees, along with the electricity and water bills of citizens and businesses, for three months. The government of Saudi Arabia, meanwhile, launched a multifaceted SR132bn ($35.2bn) stimulus package in mid-April 2020, consisting of SR70bn ($18.7bn) in support for the private sector, SR50bn ($13.3bn) in stimulus for the banking sector and small and medium-sized enterprises, and SR12bn ($3.2bn) in social assistance, including support for low-income families and micro-entrepreneurs, among others.

Private Sector Actions

While governments moved to support the economy, companies in the private sector were forced to adapt to the new normal. In response to the sharp increase in demand for online services, many retailers worked to upgrade their digital offerings, particularly in terms of ordering, delivery and payment. One example is Dubai, whose shopping malls are a top tourist attraction. Following the implementation of health restrictions that led to the closure of all non-essential businesses, The Dubai Mall – the largest retail space in the UAE – launched a virtual store on regional e-commerce platform noon.com. This came as Mall of the Emirates, the emirate’s second-largest mall, launched an online shopping platform called Trends at Your Doorstep, and hypermarket chain Carrefour UAE upgraded its portal to a full-scale online marketplace.

The private sector responded to the crisis more broadly by investing in digital technology. According to OBG’s Gulf Covid-19 CEO Survey, conducted in July 2020, 36% of respondents said that their companies had invested in automation software or hardware, with the figure reaching nearly 60% in the UAE.

Food Security

With the pandemic leading to the closure of many borders and the disruption of supply chains, there were region-wide collaborative efforts to shore up supplies of essential items such as food, water and medicine. As the region is a net importer of food and water, this was of particular importance. In mid-April 2020 the GCC adopted a Kuwaiti proposal to create a joint food supply network across the bloc. Concerned by disruptions to trade, the countries set up special arrangements at border control and Customs posts that facilitated the movement of food and medical supplies. In an attempt to further strengthen its food security, Kuwait struck a deal to streamline the import of Egyptian products, which were previously subject to extensive testing, and approved imports of beef from Brazil.

Oil & Travel

With many oil-producing and exporting countries, the Middle East was dramatically affected by Covid-19 economically. Still, according to the IMF’s April 2021 edition of the “World Economic Outlook” database, the economies of Middle East and Central Asia contracted by 2.9% in 2020 – less than the global average of 3.3%. Notwithstanding the considerable efforts to achieve economic diversification in various countries, the region’s short-term recovery is likely to be closely linked to the price of oil. Underlining this, 67% of respondents to the Gulf Covid-19 CEO Survey said that oil prices will either significantly or very significantly impact the trajectory of their respective national economic recoveries.

Another key factor will be the resumption of travel. With countries such as the UAE, Qatar and Bahrain home to significant leisure and entertainment sectors, often closely tied to their aviation industries, the restrictions on cross-border travel throughout 2020 took a toll. Although badly affected overall, there was a gradual recovery in aviation activity in the second half of the year. The number of flights from the UAE doubled between the beginning of June and early November 2020, and while the number of passengers handled at Dubai International Airport was down 70% year-on-year in October 2020 – at 1.6m – this was around 25% higher than the previous month.

Although airlines implemented strict temperature controls and social-distancing protocols to encourage travel, most industry stakeholders believe that progress will only be made once an effective vaccine is widely available. To this end, the development, approval and ongoing deployment of Covid-19 vaccines bodes well for businesses in 2021. In addition to opening up travel, vaccines could provide opportunities for logistics and last-mile transport companies in the region. The IMF forecast growth in the Middle East and Central Asia will rebound to 3.7% in 2021, below the global figure of 6%.