Economic impact of coronavirus not easing up - Capital Economics
Middle East & North Africa Economics

Economic impact of coronavirus not easing up

Middle East Chart Book
Written by William Jackson
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The rapid spread of the coronavirus in the region means that plans to lift lockdowns have come later than in many other EMs and the damaging economic effects of social distancing have persisted. The Gulf economies have also suffered from the effects of lower oil prices, although pressure on dollar pegs has eased as policymakers have stepped up fiscal austerity measures. Elsewhere, the shutdown of tourism sectors and a collapse in external demand has taken its toll on North Africa, prompting Egypt, Morocco, and Tunisia to turn to the IMF. The economic turmoil in Algeria and Lebanon has only got worse and, with no financial support in place, even sharper and more disorderly adjustments remain a key risk.

  • The rapid spread of the coronavirus in the region means that plans to lift lockdowns have come later than in many other EMs and the damaging economic effects of social distancing have persisted. The Gulf economies have also suffered from the effects of lower oil prices, although pressure on dollar pegs has eased as policymakers have stepped up fiscal austerity measures. Elsewhere, the shutdown of tourism sectors and a collapse in external demand has taken its toll on North Africa, prompting Egypt, Morocco, and Tunisia to turn to the IMF. The economic turmoil in Algeria and Lebanon has only got worse and, with no financial support in place, even sharper and more disorderly adjustments remain a key risk.
  • The coronavirus has continued to spread across the region over the past month. Testing has been ramped up and, while some countries have announced plans to gradually re-open parts of the economy, measures have remained strict during Eid al-Fitr.
  • The blow to Saudi GDP growth in March and April from the coronavirus outbreak was partially mitigated by rising oil production. Even so, the collapse in oil prices triggered a large draw of foreign exchange reserves in order to maintain the dollar peg and the authorities have outlined further austerity measures, including the tripling of the VAT rate and the suspension of the Cost of Living Allowance.
  • The UAE has been hit hard by measures to contain the outbreak. All sectors have been severely affected, and a recent survey points to a large rate of business closures over the coming months. In Qatar, retail and real estate sectors have been heavily affected by the crisis. Weak demand has caused deflation to deepen.
  • Across the rest of the Gulf, low oil prices have raised fears that Bahrain and Oman will be forced to devalue their currencies but we think that financial support from their neighbours will help to avoid such an outcome.
  • Egypt’s authorities reaffirmed this month that, after securing emergency financing from the IMF, they are seeking a more traditional Stand-By Arrangement with the Fund. High on the IMF’s demands will be for the central bank to let the pound weaken.
  • In the rest of North Africa, both Morocco and Tunisia have leant on the IMF for financial support as the virus outbreak pummels their large tourism sectors. Meanwhile, the plunge in oil prices has exacerbated the strains in Algeria’s balance of payments.
  • Lebanon’s government outlined its economic rescue plan this month, which includes turning to the IMF for financial assistance. But we think securing a deal will be extremely difficult. Meanwhile, Jordan secured emergency financing from the IMF as it tackles the economic hit from the coronavirus outbreak.
  • Financial markets have recovered some of the ground they lost during March and April. Pressure on dollar pegs in the Gulf eased, sovereign dollar bond spreads have narrowed, and equities have bounced back.

Coronavirus

  • The coronavirus outbreak has continued to spread across the region, particularly in the Gulf (1). A positive sign, however, is that the number of new daily cases has started to tick down over the past week (2). Testing has been most prevalent in Bahrain and the UAE, where around 15% of the population has been tested, but less so in the region’s poorer economies (3).
  • Qatar remains the worst-afflicted country in the region with more than double the amount of cases relative to its population compared with other MENA countries (4). The Gulf has, so far, recorded a lower death rate from the virus compared with the North African countries of Algeria, Egypt, Tunisia, and Morocco (5).
  • With the case numbers still high, governments have kept strict social distancing measures in place to contain the outbreak (6). Several countries had eased some measures during Ramadan, but they were tightened again during Eid al-Fitr. Only in the past week or so have some countries, such as Saudi Arabia, the UAE, and Tunisia, announced plans to ease lockdowns over the next month.

Chart 1: Confirmed Coronavirus Cases (Log-Scale)

Chart 2: Daily New Coronavirus Cases in MENA

Chart 3: COVID-19 Tests (per 000 Population)

Chart 4: Confirmed Coronavirus Cases
(per mn Population)

Chart 5: Deaths (per 1000 Confirmed Cases)

Chart 6: Total Confirmed Coronavirus Cases & Policy Stringency Index

Sources: CEIC, Refinitiv, Markit, Capital Economics


Saudi Arabia

  • The past month has brought further evidence of the blow to the Saudi economy from the coronavirus crisis and collapse in oil prices. ATM withdrawals and point of sale transactions, proxies for consumer spending, dropped by close to 10% y/y in March (7). Deliveries of cement and clinker plunged by almost 30% y/y last month (8). And while the whole economy PMI rose in April, it stayed close to its record low and well below the 50 mark which, in theory, separates expansion from contraction (9).
  • The hit to the economy was partially offset by rising oil output following the collapse of OPEC+ talks in late-March. But this support has already started to fade after Saudi and other oil producers agreed to substantial output reductions (10). And while oil prices have rebounded in recent weeks, they are still well below the levels that Saudi Arabia needs to balance its budget and current account positions.
  • The Kingdom drew down $24bn of its FX reserves in March (11) in order to maintain the dollar peg and the monetary authority, SAMA, has reiterated its commitment to the current exchange rate regime. Instead, the authorities are relying on fiscal austerity to make the adjustment to low oil prices. Earlier this month, the government announced that it will triple the VAT rate to 15%. This will cause inflation, which stood at 1.3% y/y in April (12), to jump. The Cost of Living Allowance will also be suspended.

Chart 7: Sum of ATM Cash Withdrawals and
Point of Sale Transactions

Chart 8: Local Deliveries of Cement and Clinker

Chart 9: Whole Economy PMI

Chart 10: Oil Production

Chart 11: Foreign Exchange Reserves ($bn)

Chart 12: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


United Arab Emirates

  • Efforts to contain the coronavirus outbreak are hitting the UAE’s economy hard. The whole economy PMI, which covers the non-oil private sector, dropped to a record low of 44.1 in April and the survey for Dubai fell even further (13).The damage to Dubai’s economy was highlighted by a recent survey which showed that a majority of businesses expect to close within the next year, with those in the travel and tourism sector expecting to suffer the most pain (14).
  • The authorities have sounded out a possible opening of the tourism sector in the summer but, for now, almost all flights in and out of the UAE remain cancelled (15). And while there has been an uptick in activity in retail and recreational sectors, it remains well below the levels recorded last year (16).
  • Oil production surged in March and April as the UAE followed Saudi Arabia in ramping up production after OPEC+ talks fell apart (17). But energy minister, Suhail al-Mazrouei, has confirmed output will be reduced in the coming months in line with the latest deal among global oil producers. Finally, consumer price figures for April showed that the pace of deflation accelerated from 1.6% y/y in March to 1.9% y/y last month as weaker non-food inflation more than offset a jump in food inflation (18).

Chart 13: Whole Economy PMI

Chart 14: Dubai Survey of Risk of Going Out of Business Due to COVID-19 by Sector (%)

Chart 15: UAE Cancelled Departure Flights
(% of Total Scheduled Flights) Dubai, Abu Dhabi?

Chart 16: UAE Google Mobility Data on Retail & Recreation Sectors (%-pts Deviation from 2019)

Chart 17: UAE Oil Production

Chart 18: UAE Consumer Prices %(y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Qatar

  • Qatar’s economy has been suffered on the back of measures to contain the coronavirus outbreak. The whole economy PMI slumped to a record low of 39.0 in April (19) and figures from Google on residents’ movement show that activity in retail and recreation sectors remains well below 2019 levels (20). Flight cancellations are still high, with around half of all scheduled flights not running (21).
  • The real estate sector has continued to weaken – prices fell by over 12% y/y in March (22) and are now down by 30% since their peak in 2014. Meanwhile, the credit boom has stalled in recent months, although lending still grew by a punchy 19.8% y/y in March (23). Banks have relied heavily on external financing to fuel the recent credit boom, but this now seems to have run its course and we expect credit growth to slow sharply over the coming months.
  • Finally, consumer price figures for April showed a sharp fall in the headline inflation rate from -1.3% y/y in March to a decade low of -3.1% y/y (24). This was driven by non-food prices, particularly transport, which more than offset rising food price inflation.

Chart 19: Whole Economy PMI

Chart 20: Google Mobility Data on Retail & Recreation Sectors (%-pts Deviation from 2019)

Chart 21: Real Estate Prices

Chart 22: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 23: Private Sector Credit

Chart 24: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Rest of the Gulf

  • The rest of the Gulf remains in lockdown and, while measures were eased slightly over the course of Ramadan, they were ramped up in Kuwait during Eid al-Fitr (25). Travel restrictions are still in place and flight cancellations remain at close to 100% (26). Tourism sectors are not as large in Kuwait and Oman compared with the rest of the region. Bahrain is more vulnerable.
  • The collapse in global demand has kept oil prices subdued, with Brent crude currently trading at $34pb. This is well below the breakeven prices of both Bahrain and Oman (27) and raised fears of devaluations – reflecting this, dollar bond spreads remain much wider than in the other Gulf countries (28). We expect devaluations to be avoided as the rest of the Gulf comes forward with financing – Bahrain already secured $10bn bailout in 2018 and we expect Oman to follow suit in the not-too-distant future.
  • Kuwait followed Saudi Arabia and the UAE in raising oil production in March and April, which will have provided some support for the economy (30). But the recent decision to cut production sharply in a bid to boost oil prices means that this boost will fade. Finally, inflation eased in Bahrain and Oman in March, to -1.8% y/y and -0.3% y/y respectively, but rose to 1.9% y/y in Kuwait. (31).

Chart 25: Oxford University Restrictiveness Index (100 = Full Lockdown, T = 10th Confirmed Case)

Chart 26: Cancelled Departure Flights
(% of Total Scheduled Flights, 7-Day Avg.)

Chart 27: Breakeven Oil Prices ($pb)

Chart 28: JP Morgan EMBI Sovereign Dollar Bond Spreads Over US Treasuries (bp)

Chart 29: Kuwait Oil Production

Chart 30: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • The number of confirmed coronavirus cases in Egypt has shown no signs of slowing yet (31) as the authorities struggle to bring the virus under control. Containment measures have weighed heavily on economic activity. The whole economy PMI slumped from 44.2 in March to a record-low of 29.7 in April (32) and almost all international flights remain cancelled (33). The tourism sector has missed out on a key period, and the disruption is likely to extend into the summer (34).
  • The collapse in tourist arrivals, combined with the downturn in external demand for Egypt’s exports and weaker Suez Canal revenues (35), has resulted in strains in the balance of payments. In order to keep a tight grip on the pound, the central bank (CBE) drew down its foreign exchange reserves by $8.5bn over the course of March and April.
  • The government secured a $2.8bn Rapid Financing Instrument from the IMF this month and reaffirmed its commitment to seek a more traditional Stand-By Arrangement from the Fund. The IMF is likely to demand that the CBE allows the pound to weaken further against the dollar. Inflation is low and we doubt that a fall in the currency would push it up significantly (36). This would pave the way for the CBE to resume its easing cycle to support the economy, particularly in light of limited fiscal stimulus.

Chart 31: Confirmed COVID-19 Cases

Chart 32: Whole Economy PMI

Chart 33: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 34: Tourist Arrivals
(Avg., 2011-19, Peak Month of Arrivals = 100)

Chart 35: Suez Canal Revenues ($, % y/y)

Chart 36: Consumer Prices & Overnight Deposit Rate

Sources: CEIC, Refinitiv, Capital Economics


Rest of North Africa

  • The number of confirmed coronavirus cases across North Africa has started to flatten out (37) and prompted authorities to discuss plans to ease lockdowns. The economic impact has been most acute in Morocco and Tunisia, where tourism sectors are large (38). The hit will intensify if travel restrictions and households’ hesitancy to travel weighs on tourist arrivals into the peak summer months (39).
  • Morocco and Tunisia have also suffered from the slump in global trade, with exports plummeting in March and April (40). Both countries have turned to the IMF for financial assistance. Tunisia has secured emergency financing and is in talks to agree a more traditional deal to replace its previous one that expired in March. Morocco has drawn down the entirety of its $3bn precautionary liquidity line.
  • Algeria, in contrast, has distanced itself from the Fund. As well as the coronavirus crisis, the economy is suffering due to the collapse in oil prices. This has raised concerns about its poor external position – the current account deficit is large and FX reserves have been heavily depleted over the past five years (41). The authorities have loosened their grip on the dinar to ease some of the pressure (42).

Chart 37: Confirmed COVID-19 Cases (Log-Scale)

Chart 38: Tourism

Chart 39: Tourist Arrivals
(Avg., 2011-19, Peak Month of Arrivals = 100)

Chart 40: Exports (% y/y, 3m avg.)

Chart 41: Algeria FX Reserves (US$bn)

Chart 42: Algerian Dinar (vs. €-$ Basket, Inverted)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • Lebanon’s government outlined its economic rescue plan late last month and formally entered talks with the IMF over financing, but we think that securing a deal will prove difficult. Meanwhile, measures to contain the coronavirus are exacerbating the country’s economic downturn – the whole economy PMI dropped to a fresh-record-low of 30.9 in April (43).
  • The Lebanese pound has continued to come under pressure on the black market, where it is trading at more than 4,200/$ – 65% weaker than the official rate. This, combined with restrictions on access to foreign currency, has led to a collapse in imports, which contracted by around 50% y/y in March (44). Imports have fallen faster pace than exports, helping to rein in the large current account deficit (45).
  • Elsewhere, Jordan secured an additional $396mn emergency financing package from the IMF to help address the country’s economic slump and deteriorating twin deficits (46). The country’s large tourism sector, which contributes around 20% of GDP, will enter its peak season over the coming months (47). Meanwhile, the industrial sector was struggling prior to the virus outbreak and the drop in output deepened in March to record the worst outturn since 2003 (48).

Chart 43: Lebanon Whole Economy PMI

Chart 44: Lebanon Exports & Imports (% y/y)

Chart 45: Lebanon Current Account Balance
(% of GDP)

Chart 46: Jordan Budget & Current Account Bal. (% GDP)

Chart 47: Tourism (% of GDP)

Chart 48: Jordan Industrial Production

Sources: CEIC, Refinitiv, Markit, Capital Economics


Financial Markets

  • Equity indices have recovered some of their lost ground over the past month – the MSCI Arabian Markets Index rose by 3.4% m/m. That was a stronger performance than the wider MSCI Emerging Markets Index, which increased by 2.3% over the same period (49). Rebounds in equity indices in the Gulf, particularly in Kuwait, Qatar and Saudi Arabia, drove the rise (50).
  • Sovereign dollar bond spreads have narrowed across the region (51). Having surged earlier in the year, Oman’s spreads have narrowed sharply as fears over a devaluation eased, although some form of explicit financing from the rest of the Gulf will be needed sooner rather than later. In Dubai, the sovereign dollar bond spread also narrowed after reports suggested that Abu Dhabi would come to the rescue to stave off a fresh debt crisis (52).
  • Over the past month, currencies in the region have held up relatively well. Pressure on dollar pegs in the Gulf has eased somewhat and currencies in North Africa only weakened a little. In Morocco, the dirham actually strengthened by 1.2% m/m against its euro-dollar basket (53). Meanwhile, the Egyptian pound finally moved against the dollar for the first time in around two months, but it still only weakened by 0.7% m/m (54).

Chart 49: MSCI Index (Local Ccy, 1st Jan. 2020= 100)

Chart 50: Equity Indices (Local Ccy., % Change)

Chart 51: EMBI Sovereign Dollar Bonds

Chart 52: EMBI Sovereign Dollar Bonds (bp)

Chart 53: Change in Currency (vs. US Dollar, %)

Chart 54: Egyptian Pound (vs. $, Inverted)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Background Data

Chart 55: GDP ($bn, 2019, Market Exchange Rates)

Chart 56: Population (Millions, 2019)

Chart 57: GDP Per Capita
($000, 2019, Market Exchange Rates)

Chart 58: Share of World Output (%, 2019, PPP)

Chart 59: Real GDP (% y/y)

Chart 60: Consumer Prices (% y/y)

Chart 61: Budget Balance (% of GDP)

Chart 62: Current Account Balance (% of GDP)

Sources: CEIC, Refinitiv, Capital Economics


Key Historic Data

Table 1: Real GDP & Inflation

Share of World1

GDP (% y/y)

Inflation (% y/y)

15-19

2015

2016

2017

2018

2019

15-19

2015

2016

2017

2018

2019

Saudi Arabia

1.3

1.6

4.1

1.7

-0.7

2.4

0.3

0.7

1.3

2.0

-0.9

2.5

-1.2

Egypt

1.0

4.7

3.9

3.9

5.0

5.4

5.5

15.7

10.6

14.4

30.6

14.0

8.6

United Arab Emirates

0.5

2.4

5.1

3.1

0.5

1.7

1.5

1.8

4.1

1.6

2.0

3.1

-1.9

Algeria

0.5

2.3

3.7

3.4

1.6

1.5

1.5

4.6

4.8

6.4

5.6

4.3

2.0

Qatar

0.3

1.6

3.6

2.2

1.7

1.4

-0.8

0.9

1.7

2.8

0.4

0.3

-0.6

Morocco

0.2

3.0

4.5

1.1

4.2

3.0

2.2

1.3

1.5

1.6

0.8

1.8

0.7

Kuwait

0.2

0.2

0.6

2.9

-3.5

1.2

-0.5

2.1

3.7

3.5

1.5

0.6

1.1

Oman

0.1

2.2

4.7

5.0

-0.9

2.0

0.5

0.8

0.3

1.0

1.4

0.9

0.1

Tunisia

0.1

1.6

1.2

1.3

1.8

2.5

1.0

5.6

4.7

3.7

5.3

7.3

6.7

Jordan

0.1

2.1

2.4

2.0

2.1

2.0

1.8

1.6

-0.9

-0.8

3.3

4.5

2.0

Lebanon

0.1

0.0

0.4

1.6

0.6

0.2

-3.0

1.8

-3.7

-0.8

4.5

6.1

2.9

Bahrain

0.1

2.8

2.9

3.5

3.8

2.5

1.5

1.8

1.9

2.7

1.4

2.1

1.0

Middle East & North Africa

4.5

2.4

3.8

2.6

1.3

2.7

1.7

4.6

3.9

4.9

7.1

5.1

1.8

1)% 2018 in PPP terms

Table 2: Current Account & Budget Balance

Current Account (% of GDP)

Budget Balance (% of GDP)

15-19

2015

2016

2017

2018

2019

15-19

2015

2016

2017

2018

2019

Saudi Arabia

0.9

-8.7

-3.7

1.5

9.0

6.3

-9.6

-15.8

-12.9

-9.0

-6.0

-4.5

Egypt

-4.2

-5.2

-6.2

-3.3

-3.1

-3.4

-10.5

-11.4

-12.5

-10.9

-9.7

-8.1

United Arab Emirates

6.8

4.9

3.7

7.3

9.1

9.0

-1.1

-3.4

-2.0

-1.7

0.6

1.2

Algeria

-12.3

-14.8

-15.8

-13.0

-7.0

-11.0

-10.4

-15.3

-13.0

-6.5

-5.0

-12.0

Qatar

4.2

8.4

-5.5

3.9

8.7

5.5

0.7

4.4

-5.4

-2.9

5.3

2.0

Morocco

-4.0

-2.1

-4.4

-3.6

-5.5

-4.4

-4.1

-4.2

-4.5

-3.5

-3.7

-4.5

Kuwait

6.0

3.5

-4.2

8.0

14.4

8.0

6.6

5.6

0.3

6.6

11.3

9.0

Oman

-12.8

-15.9

-18.7

-15.2

-5.5

-8.8

-13.7

-16.1

-21.3

-14.0

-7.9

-9.4

Tunisia

-10.2

-9.0

-9.0

-10.5

-11.0

-11.5

-5.5

-6.0

-5.8

-5.8

-5.0

-5.0

Jordan

-8.7

-9.0

-9.4

-10.6

-7.4

-7.0

-4.9

-8.5

-3.7

-3.7

-4.8

-4.0

Lebanon

-23.3

-19.3

-23.1

-25.7

-27.0

-21.5

-10.0

-9.1

-9.4

-8.5

-11.5

-11.5

Bahrain

-5.1

-2.4

-4.6

-4.5

-5.9

-8.0

-9.7

-13.5

-14.1

-9.7

-5.5

-5.5

Source: Refinitiv


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com
Jason Tuvey, Senior Emerging Markets Economist, jason.tuvey@capitaleconomics.com
James Swanston, MENA Economist, james.swanston@capitaleconomics.com