Gulf states have managed the Covid health crisis well, by and large. Now, can they pivot back to long-awaited fiscal and economic reforms?
The countries of the Arabian Peninsula have by and large managed the challenges of the Covid-19 pandemic—its containment and social outcomes, at least—quite well ,compared with many other regions. Early lockdowns were effective and relatively brief. The United Arab Emirates remained open for business and have, since January, rolled out one of the world’s most rapid and complete vaccination programs.
But the economic impacts have been severe. Last year’s oil price collapse caused a sharp reduction in the value of the region’s key energy exports; earnings across the Gulf Cooperation Council’s (GCC’s) member states fell by around a third. This impacted government budgets, which remain largely dependent on revenues from oil and gas production; and while the recent firming of energy prices could mean the worst has passed, all GCC states are expected to run fiscal deficits again this year.
To plug the hole in their finances, most governments in the region have turned to the global bond markets. Total bond and sukuk issuance rose by 24% to above $126 billion, according to Bloomberg, with sovereign wealth funds and state-owned enterprises also tapping the market. Plans to reduce public sector deficits and diversify economies away from hydrocarbons had to be deferred as governments focused on meeting immediate health care challenges and maintaining their social contract with citizens through generous welfare and public sector employment.
The postponement of reforms is especially critical in countries like Oman and Bahrain, which had, even before the pandemic, relied on support from wealthier GCC states to finance their fiscal and current account deficits. After nearly half a century of conservative rule, both countries have new leadership. Sultan Haitham bin Tariq Al Said of Oman is proposing spending cuts and is introducing a value-added tax this year; while in Bahrain, Crown Prince Salman bin Hamad bin Hamad Al Khalifa took over as prime minister following the death of his great uncle, who had held the post since independence in 1971.
Whether these changes at the top really will produce more sustainable fiscal and economic polices remains to be seen. Similarly, the normalization of relations between Israel and GCC members Bahrain and the UAE may open up new routes to economic growth, or not. The ending of the boycott of Qatar is likely to have a more tangible effect, reinvigorating trade and financial flows within the region, although it will take time for the damage done to GCC cohesiveness to heal.
Shifting Away From Cash
One of the coronavirus’ most striking impacts on Arabia has been to accelerate the shift from cash to remote payments. Remote working, social distancing and the active encouragement of governments have triggered a surge in use of remote payment channels and digital banking.
That shift has left regional banks scrambling to upgrade their online and mobile offerings, and it has provided a boost to nascent fintech hubs based in Bahrain and the UAE. It has also focused M&A activity within the region squarely on companies with digital strengths, whether those be in e-commerce, health care or pure fintech. While fewer deals have been completed of late, those have been much larger, and have attracted investment from global players such as Uber and Amazon.