Virus measures may limit spread but recession lies ahead - Capital Economics
Middle East & North Africa Economics

Virus measures may limit spread but recession lies ahead

Middle East Chart Book
Written by William Jackson
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The outbreak of the coronavirus in the Middle East and North Africa has developed rapidly over the past month and, given this, most of the backwards-looking figures released over this period are likely to tell us little about the current state of economies in the region. This Chart Book will, instead,focus on more timely measures of activity to give us a better sense of the immediate economic fallout for the region, while also highlighting how it may ignite underlying economic vulnerabilities.
  • The coronavirus has spread rapidly throughout the Middle East and North Africa in recent weeks and has prompted governments across the region to impose increasingly draconian containment measures. These measures, along with the collapse in oil prices, will inflict extensive economic damage and we now expect the region as a whole to contract by around 1.7% this year, which would mark the worst performance since the early 1980s. We doubt that low oil prices will lead to a wave of devaluations in the Gulf but it will limit policymakers’ ability to provide fiscal support meaning that, once the virus is brought under control, economic recoveries are likely to be slow going.
  • Worryingly, the number of new coronavirus cases has continued to rise over the past few days. Relative to population size, outbreaks are worst in Bahrain and Qatar. Governments’ attempts to contain the outbreak are already having a severe impact on economic activity.
  • Saudi Arabia has stepped up efforts to contain the outbreak in recent weeks and there are firm signs that the economy is suffering. Policy support has been put in place, but the collapse in oil prices has limited direct fiscal stimulus. We doubt that the authorities will reverse course on oil policy.
  • The UAE has ramped up restrictions to get on top of the coronavirus. These measures will severely affect sectors such as tourism, retail trade and entertainment that are the backbone of Dubai’s economy. The Emirate’s large debt burden is coming back under the spotlight.
  • Across the rest of the Gulf the outbreak has been more severe. Qatar and Bahrain have seen an explosion of cases. Kuwait was the first to introduce a complete lockdown. The collapse in oil prices will cause balance sheets in Oman and Bahrain to deteriorate sharply, but we think that both countries can rely on financial support from their neighbours in order to avert devaluations.
  • Efforts to contain the coronavirus have caused congestion in Egypt’s normally traffic-heavy capital, Cairo, to fall sharply. The central bank cut interest rates by 300bp in an emergency meeting this month and further easing is likely. The authorities have stepped in to prop up the pound and, while this can continue for a little longer, we think that the authorities will eventually let the currency weaken.
  • In the rest of North Africa, large tourism sectors in Morocco and Tunisia will suffer, particularly if travel restrictions remain in place into the summer. Low oil prices will exacerbate balance of payments strains in Algeria and the authorities have loosened their grip on the dinar.
  • Lebanon is already in the midst of an economic crisis and formally entered into default this month. The coronavirus outbreak will simply make a bad situation even worse. Jordan is one of the most vulnerable economies to travel restrictions due to its large tourism sector.
  • Financial markets in the region have been hit hard over the past month. Equity markets have fallen sharply, particularly in Dubai, and sovereign dollar bond spreads have widened across the board.

Coronavirus

  • The coronavirus has spread quickly throughout the region in the past month. Of the confirmed cases, Saudi Arabia and Qatar have almost half of all cases in the region (1). Relative to population size, outbreaks are largest in Bahrain and Qatar (2). Worryingly, the past couple of weeks have seen a sharp increase in the number of new cases (3).
  • Reflecting this, Google searches for “coronavirus” have spiked (4). In a bid to slow the spread of the virus, governments have implemented increasingly draconian social distancing measures. Several cities in Saudi are in lockdown, while other parts of the region have imposed curfews and travel restrictions.
  • While timely activity data in the region is hard to come by at the best of times, social distancing measures are clearly having a serious impact already. Figures from TomTom show that major cities across the region have seen a sharp fall in traffic compared to the same period last year (5). In Jeddah, Riyadh, Dubai and Abu Dhabi there is close to ‘zero’ congestion. What’s more, in the UAE, the revenue of cinemas in the country has fallen sharply too as more residents stay at home (6).

Chart 1: Total Confirmed Coronavirus Cases
(T=Day of First Confirmed Case, Log-Scale)

Chart 2: Confirmed Coronavirus Cases
(per mn Population)

Chart 3: Daily New Coronavirus Confirmed Cases
in MENA

Chart 4: Google Searches of “Coronavirus” in the Gulf
(100 = Peak of Searches)

Chart 5: Traffic Congestion in Major Cities
(17th Mar. – 27th Mar., % Deviation from 2019)

Chart 6: UAE Cinema Box Office Sales ($mn)

Sources: CEIC, Refinitiv, Markit, Capital Economics

Saudi Arabia

  • The rapid rise in coronavirus cases in Saudi Arabia over the past week (7) has prompted the authorities to step up their efforts to contain the outbreak. The cities of Riyadh, Mecca and Medina are in lockdown and travel between the Kingdom’s 13 regions has been banned. The sharp decline in February’s whole economy PMI suggested that non-oil activity was already struggling (8) and these measures are causing activity to dry up. For example, traffic congestion is well below 2019 levels (9).
  • To try to limit the economic fallout, interest rates have been lowered following rate cuts by the Fed and banks have been instructed to waive loan repayments. But the plunge in oil prices to below $30pb has dented policymakers’ appetite for direct fiscal support. Both budget and current account positions are in deficit at these prices (10). Large FX savings mean that the dollar peg will almost certainly stay intact.
  • But the finance minister has announced that budgeted spending for this year will be cut by 5%. This may suggest that the authorities are preparing for a prolonged period of low oil prices and have no plans to reverse course on oil policy. A rapid increase in oil output (11) means that, over 2020 as a whole, the Saudi economy is still likely to expand – we have pencilled in growth of 2% (12).

Chart 7: Confirmed COVID-19 Cases

Chart 8: Whole Economy PMI

Chart 9: Traffic Congestion (% Deviation from 2019)

Chart 10: Break-even Oil Prices ($pb)

Chart 11: Oil Production (% y/y)

Chart 12: GDP (% y/y)

Sources: CEIC, Refinitiv, Capital Economics

United Arab Emirates

  • Cases of the coronavirus have risen sharply in the UAE over the past couple of weeks (13). The government has implemented draconian social distancing measures and suspended all air travel, causing flight cancellations to increase sharply (14). The measures have also caused traffic congestion in Dubai and Abu Dhabi to slump compared to this time last year (15).
  • Dubai’s economy is the most vulnerable in the region to social distancing and travel restrictions. A third of the economy is made up of sectors that are likely to be severely affected (16) And there is a growing risk that the World Expo, which was due to begin in October, is postponed.
  • The economic downturn is likely to raise concerns about Dubai’s large debts, in particular those of government-related entities (GREs) (17). If the Expo fails to provide the permanent boost to Dubai’s attractiveness as a tourist and business hub that the government is hoping for, overcapacity in the real estate – where prices are already 30% below their 2015 peak (18) – will continue to mount. This would make it more difficult for the GREs to service their debts.

Chart 13: UAE Confirmed COVID-19 Cases

Chart 14: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 15: Traffic Congestion (% Deviation from 2019)

Chart 16: Sectors* at Risk of Social Distancing
(% of GDP)

Chart 17: Dubai GREs Debt Repayment Schedule
(% of GDP)

Chart 18: Dubai Residential Property Prices

Sources: CEIC, Refinitiv, Markit, Capital Economics

Rest of the Gulf

  • In the rest of the Gulf, the outbreak has taken a significant toll on activity. Kuwait City has seen a sharp fall in traffic congestion (19) after the government announced a nationwide public holiday until mid-April. The suspension of air travel Gulf has caused a sharp pick-up in flight cancellations (20).
  • Qatar, Bahrain, Oman and Kuwait are those in the Gulf where sectors most susceptible to social distancing are smallest. But Oman and Bahrain are the most vulnerable to the recent collapse in oil prices. Brent crude is currently trading at $25pb, well below their breakeven budget and current account prices (21). And FX savings provide only a limited buffer (22). As a result, dollar bond spreads widened sharply (23) We expect the other Gulf countries to deliver financing to avert devaluations.
  • In contrast, Kuwait and Qatar are much better placed to withstand a period of low oil prices. What’s more, the hit to Kuwait’s economy from the coronavirus outbreak will be mitigated by stronger growth in the oil sector (24). Indeed, following the collapse of the OPEC+ talks this month, it’s likely that production from the shared field with Saudi Arabia is brought on stream more quickly.

Chart 19: Kuwait City Traffic Congestion (%)

Chart 20: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 21: Breakeven Oil Price ($pb)

Chart 22: Gulf Foreign Exchange Savings

Chart 23: Gulf Sovereign Dollar Bond Spreads Over US Treasuries (bp)

Chart 24: Kuwait Oil Production (% y/y)

Sources: CEIC, Refinitiv, Capital Economics

Egypt

  • Coronavirus cases in Egypt have climbed rapidly over recent weeks, forcing the authorities to impose increasingly draconian measures. A curfew is now in place with only shops offering essential items allowed to remain open. At the same time, all international flights have been suspended until mid-April (25). As a sign of the disruption to activity, congestion in the capital city, Cairo, has fallen sharply (26).
  • Those sectors most vulnerable to social distancing measures make up a relatively large share of Egypt’s economy (27). The collapse in tourist numbers will hit the economy hard – tourism directly accounts for around 12% of GDP (28). This, coupled with the slump in global trade weighing on exports and Suez Canal receipts, will cause the current account deficit to widen.
  • In an effort to limit the economic fallout, the Central Bank of Egypt lowered interest rates by 300bp, to 9.25%, at an emergency meeting this month and we think that further easing lies in store (29). Banks have been instructed to postpone loan repayments and the government has lowered electricity prices for industry. The authorities have intervened to prop up the pound (30) and, while there is scope for this to continue for a little longer, we think that the authorities will eventually let the currency weaken.

Chart 25: Cairo International Airport Cancelled Departure Flights (% of Scheduled Flights)

Chart 26: Cairo Traffic Congestion
(% Deviation from 2019)

Chart 27: Sectors Vulnerable to Social Distancing
(% of GDP)

Chart 28: Tourism (Direct Contribution to GDP, %)

Chart 29: Overnight Deposit Rate (%)

Chart 30: Egyptian Pound (vs. $, Inverted)

Sources: CEIC, Refinitiv, Capital Economics

Rest of North Africa

  • Cases in Algeria, Tunisia and Morocco have jumped, particularly in Algeria which has the most deaths in the region due to the virus. Algeria has also felt the brunt of the drop in oil prices, which will exacerbate balance of payments strains. FX reserves have been depleted (31) and the authorities have loosened their grip on the dinar – we expect it to fall 20% against its euro-dollar basket by year-end.
  • Elsewhere, Morocco and Tunisia’s economies are among the most vulnerable in the region due to the strict travel restrictions put in place. Tourism sectors make up just under 20% of GDP (33) and the impact will be felt most acutely if travel restrictions remain in place over the peak summer months (34). Both economies are likely to contract sharply this year (35).
  • In an effort to prop up activity, central banks have cut interest rates. IMF deals will help to contain any balance of payments strains that emerge – Tunisia is in the process of agreeing a new deal this month. That said, the Moroccan authorities took a further step towards a more flexible exchange rate this month by widening the trading band for dirham – the currency has since weakened by 1.5% against its euro-dollar basket (36).

Chart 31: Algeria FX Reserves (US$bn)

Chart 32: Algerian Dinar (vs. EUR-USD Basket, Inverted)

Chart 33: Tourism (% of GDP)

Chart 34: Tourist Arrivals
(Avg. 2011-2019, Peak Month of Arrivals = 100)

Chart 35: GDP (% y/y)

Chart 36: Moroccan Dirham (vs. EUR-USD Basket)

Sources: CEIC, Refinitiv, Capital Economics

Lebanon & Jordan

  • Lebanon’s default on its $1.2bn sovereign Eurobond (due initially on 9th March) was formally deemed a credit event this week and the government announced it would stop paying all Eurobonds (37). It is not yet clear how the authorities plan to push ahead, but Hezbollah has walked back on its previous opposition to a financial package from the IMF.
  • The Lebanese and Jordanian economies are extremely vulnerable to social distancing measures and travel restrictions. Tourism directly contributes 5.5% of GDP in Jordan and 7.3% of GDP in Lebanon, with substantial indirect effects (38). The sector is also a significant source of employment (39). The collapse in tourism receipts will cause the already-fragile current account positions to deteriorate (40).
  • Timely activity data show that the strict lockdowns put in place have caused cinema box office sales to collapse (41). Overall, the coronavirus outbreak will simply make what was already a bad situation in Lebanon even worse – we have pencilled in a decline in GDP of 12%. And in Jordan, the decline in tourism and lockdown of the economy will lead to an 6.5% fall in output (42).

Chart 37: Lebanon Outstanding Eurobond Principal Repayments ($bn)

Chart 38: Tourism (% of GDP)

Chart 39: Tourism Employment
(% of Total Employment)

Chart 40: Current Account Balances (%of GDP)

Chart 41: Cinema Box Office Sales ($mn)

Chart 42: GDP (% y/y)

Sources: CEIC, Refinitiv, Capital Economics

Financial Markets

  • Financial markets have taken a thumping this past month. Equity markets in all countries have fallen sharply (43), although they have not dropped as far as those in the rest of the emerging world – the MSCI Arabian Markets Index is down 22% compared with a 25% fall in the MSCI EM Index (44). Dubai has seen the largest fall of over 35% in the past month and is now down almost 40% year-to-date (45).
  • Sovereign dollar bond spreads widened in all countries (46). Spreads widened the most in Tunisia (47), where the coronavirus-related slump in tourism will cause the country’s poor balance of payments position to deteriorate further. In the Gulf, spreads widened sharply in Bahrain and Oman, which are the most vulnerable economies to the collapse in oil prices.
  • Finally, currencies also weakened against the dollar over the past month (48). The Lebanese pound continues to trade at a large discount to the official peg on the black market. Meanwhile, in Morocco, the widening of the trading band earlier this month prompted the dirham to weaken. Official intervention is almost certainly behind the Egyptian pound’s relatively strong performance.

Chart 43: Equity Indices
(Local Curr., % Change, 26th Feb. – 26th Mar.)

Chart 44: MSCI Index (Local Ccy, Jan 2019=100)

Chart 45: UAE Equity Markets (1st Jan 2019 = 100)

Chart 46: Change in EMBI Dollar Bond Spreads Over US Treasuries (bp, Change 26th Feb. – 26th Mar.)

Chart 47: Tunisia EMBI Sovereign Dollar Bond Spread Over US Treasuries (bp)

Chart 48: Currencies (vs. $, % Change)

Sources: CEIC, Refinitiv, Markit, Capital Economics

Background Data

Chart 49: GDP ($bn, 2019, Market Exchange Rates)

Chart 50: Population (Millions, 2019)

Chart 51: GDP Per Capita
($000, 2019, Market Exchange Rates)

Chart 52: Share of World Output (%, 2019, PPP)

Chart 53: Real GDP (% y/y)

Chart 54: Consumer Prices (% y/y)

Chart 55: Budget Balance (% of GDP)

Chart 56: Current Account Balance (% of GDP)

Sources: CEIC, Refinitiv, Capital Economics

Key Historic Data

Table 1: Real GDP & Inflation

Share of World(1)

GDP (% y/y)

Inflation (% y/y)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.37

2.2

3.7

4.1

1.7

-0.7

2.2

1.4

2.2

1.3

2.0

-0.9

2.5

Egypt

0.96

4.2

2.9

4.4

4.3

4.2

5.3

15.6

10.1

10.4

13.8

29.5

14.4

Algeria

0.49

2.8

3.8

3.7

3.2

1.4

2.1

4.8

2.9

4.8

6.4

5.6

4.3

United Arab Emirates

0.54

3.0

4.4

5.1

3.0

0.8

1.7

2.6

2.3

4.1

1.6

2.0

3.1

Qatar

0.26

2.7

4.0

3.7

2.1

1.6

2.2

1.7

3.4

1.8

2.7

0.4

0.2

Morocco

0.23

3.1

2.7

4.6

1.1

4.1

3.1

1.2

0.4

1.6

1.6

0.7

1.9

Kuwait

0.23

0.5

0.5

0.6

2.9

-3.5

1.7

2.3

2.9

3.3

3.1

1.4

0.6

Tunisia

0.11

1.9

3.0

1.2

1.1

2.0

2.5

5.2

4.9

4.8

3.6

5.3

7.3

Oman

0.15

2.4

1.4

4.7

5.0

-0.9

2.1

0.9

1.0

0.1

1.1

1.7

0.8

Lebanon

0.07

0.9

1.9

0.4

1.6

0.6

0.3

1.6

1.8

-3.7

-0.8

4.5

6.1

Jordan

0.07

2.3

3.1

2.4

2.0

2.1

2.0

1.8

2.9

-0.9

-0.8

3.3

4.5

Bahrain

0.06

3.3

4.4

2.9

3.5

3.8

1.8

2.2

2.6

1.9

2.7

1.4

2.1

Middle East & North Africa

4.5

2.8

3.7

3.7

2.6

1.3

2.8

5.1

3.9

3.9

4.8

7.2

5.5

(1)% 2018 in PPP terms

Table 2: Current Account & Budget Balance

Current Account (% of GDP)

Budget Balance (% of GDP)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.4

9.8

-8.7

-3.7

1.4

8.3

-10.1

-3.5

-15.8

-17.2

-9.2

-4.6

Egypt

-3.8

-0.9

-3.7

-6.0

-6.1

-2.4

-10.9

-11.3

-10.9

-12.5

-10.4

-9.5

Algeria

-11.9

-4.4

-16.4

-16.5

-13.2

-9.1

-9.5

-7.3

-15.3

-13.0

-6.6

-5.2

United Arab Emirates

7.1

13.5

4.9

3.7

6.9

6.6

-1.4

1.9

-3.4

-2.0

-1.6

-1.8

Qatar

8.0

24.0

8.5

-5.5

3.8

9.3

3.2

14.3

4.5

-5.4

-2.9

5.3

Morocco

-4.1

-5.9

-2.1

-4.2

-3.6

-4.5

-4.1

-4.8

-4.2

-4.5

-3.5

-3.7

Kuwait

10.2

33.4

3.5

-4.6

5.9

12.7

9.2

22.4

5.6

0.3

6.6

11.4

Tunisia

-10.1

-9.8

-9.7

-9.3

-10.2

-11.2

-5.2

-3.9

-5.3

-6.2

-5.9

-4.6

Oman

-10.1

5.2

-15.9

-18.7

-15.2

-5.9

-11.8

-1.1

-15.9

-21.2

-12.9

-7.7

Lebanon

-24.7

-28.2

-19.3

-23.1

-25.7

-27.0

-8.9

-6.2

-9.1

-9.4

-8.6

-11.0

Jordan

-8.7

-7.2

-9.0

-9.4

-10.6

-7.4

-5.9

-8.6

-8.5

-3.7

-3.7

-4.8

Bahrain

-2.6

4.6

-2.4

-4.6

-4.5

-5.8

-12.7

-1.6

-18.4

-17.6

-14.2

-11.7

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