The COVID-19 pandemic and oil market disruptions made 2020 a year that none of us will forget. We enter 2021 with hope and optimism - thanks to breakthroughs on vaccines and testing - but also with an awareness that change in the region is accelerating. Below are the top five themes that will shape Gulf economies in 2021.
1. Recovery and growth…
While uncertainty remains about the speed of the COVID-19 vaccine roll-out, all signs point to 2021 being a return to growth for the Gulf. IHS Markit’s December 2020 forecast for 2021 suggests all Gulf countries will return to positive economic growth - with the median real GDP growth at 3.0%.
Constrained oil production levels will put a ceiling on total economic growth while also masking the strength of the rebound in the non-oil economy. Meanwhile, the gradual reopening of country borders supports markets like the United Arab Emirates. The renewal of economic and diplomatic ties with Qatar should also be a boon to economic growth in the Gulf. The biggest test for growth, however, will be in the fourth quarter (Q4) as all eyes turn to Dubai for Expo 2020.
2. ...but, uneven growth across sectors will be apparent…
While I expect most sectors to grow in 2021, the pace of growth will be uneven due to the speed and adoption of the vaccine, economic policy decisions, broader economic performance, and consumer behavior.
The demand for destruction in 2020, the tourism, hospitality, and aviation sectors should see strong year-over-year top-line growth in 2021. The Gulf may see a quicker recovery than other regions due to lower levels of COVID-19 spread, strong public health campaigns, and large events such as the rescheduled Expo 2020 and the 2022 FIFA World Cup boosting consumer demand.
The financial sector may see margins under pressure as broader economic support provided by the government is gradually withdrawn, population declines in several markets and banks recognize provisions. Combining these factors will also weigh on the aviation sector, even with some of the initial recovery in demand expected in 2021.
Economic growth will also be uneven in the broader Middle East, which may impact non-oil exports from the GCC. Egypt’s economy is expected to remain flat or slightly contract, Iraq is at risk of further currency devaluation, and Lebanon is facing a prolonged economic contraction.
3. ...and, there will likely be an acceleration of efforts to decarbonize economies
Gulf countries will continue to be the world’s primary producers of oil and natural gas for the foreseeable future, but COVID-19 has accelerated the decarburization trend.
Oman’s new ban on single-use plastic bags, could kick-start a broader environmental trend in the region. We also expect further solar-power project awards as Dubai executes on its Clean Energy Strategy, and as Saudi Arabia builds on its recent success of awarding the lowest ever priced solar project.
Some breakthroughs may also occur as Saudi Arabia scales up blue ammonia production, NEOM moves closer to building a hydrogen ammonia plan, and Oman creates a solar-powered hydrogen generation hub. The Saudi and Qatar stock exchanges are both also working to launch Environmental-Social-Governance (ESG) indices this year.
4. Policy innovation will accelerate...
The COVID-19 pandemic and oil market disruptions of 2020 forced Gulf countries to revisit long-held public policy positions. Uneven economic growth and continued fiscal pressure in 2021 will push governments to further innovate public policy to remain competitive.
The UAE has embarked on several economic policy innovations, including 100% foreign ownership of companies in the base economy, Dubai’s remote worker visa, and an expansion of the 10-year long term visa program. The policy reforms undertaken by the UAE in the past several months’ puts pressure on other Gulf countries to revisit their own policy positions in 2021 to remain attractive relative to the UAE.
5. ...driven, in part, by sovereigns looking to improve their government fiscal balance following the dual shock
Fiscal policy for the region is likely to converge towards global common practices. We should hear more in 2021 about Oman’s planned personal income tax. We could also see more from Gulf countries on subsidy reforms and even corporate income tax as governments look to rein in fiscal deficits. 2021 could be the start of a multi-year process in which sovereigns focus on improving their fiscal positions through a mix of revenue increases, expenditure reductions, and spending efficiency gains.
Finding opportunities to deliver more efficiently is important because all Gulf countries plan to cut back on government spending in their 2021 budgets (compared to pre-COVID levels). Even with these cuts, we forecast 2021 fiscal deficits to range from -4.1% (Bahrain) to -22% (Kuwait) of GDP.
This year also marks the beginning of a large amount of Gulf sovereign debt reaching maturity - totaling nearly $20B in 2021 and rising to over $35B in 2023. Governments will likely refinance these maturing debts with new issuances often at higher interest rates. This may put pressure on domestic expenditures as increased interest payments crowd out other domestic spending.
As we look towards 2021, we should take comfort in the likely fact that we will return to economic growth across the region while also being ready for the new experiences that lie ahead we should also prepare for the unexpected during an exciting year ahead.