“Global Economic Diversification Index 2024” was released by the Mohammed Bin Rashid School of Government (MBRSG) at the World Governments Summit held in Dubai on 12th Feb 2023. Dr. Nasser Saidi & Aathira Prasad were co-authors of the report, which  was developed in cooperation with Keertana Subramani, Salma Refass and Fadi Salem (MBRSG) and Ben Shepherd (Developing Trade Consultants). 

Access the latest and past reports as well as the underlying data on the website. 

Economic diversification is a gradual, transformative process for countries that are dependent on commodities or a limited set of products or services.

Diversification for commodity producers leads to greater macroeconomic stability, more sustainable growth patterns, enables a gradual move to higher value-added economic activities (from over-dependence on primary commodities) and helps lower trade concentration (i.e., increase a country’s ability to export a wider set of products to a larger set of trade partners). This requires active and productive private sector participation, and in parallel, governments need to rollout effective policy reforms (often structural) and undertake productive investments – while diversifying the government revenue base by raising non-commodity-related revenues.

The Global Economic Diversification Index (EDI), based on publicly available indicators, data and information,provides a quantitative measure of the state and evolution of the economic diversification of countries going back to 2000. The current edition expands the coverage of countries to a total of 112 countries (7 additional countries compared to the previous EDI edition) owing to improved data availability.

The United States, China and Germany retain the top 3 ranks in the EDI for 2022, with the top 10 nations having small margins between scores (implying the strength of diversification). Western European nations account for almost two-thirds of the top 20 highly-ranked nations and while 26 of the top 30 nations are high income, there are representatives from upper-middle income (China, Mexico, and Thailand) and one lower middle-income nation (India).

At the other end of the spectrum, however, the diversification process has been long and slow. Four nations – three from Sub-Saharan Africa alongside Kuwait from the Middle East and North Africa region (MENA) – continue to remain in the bottom 20 ranks of the EDI over the period. The share of MENA nations in the bottom 20 ranks fell to just 10% from one-fourth in 2000. At the same time, there were 13 Sub-Saharan African nations among the lowest 20-ranked nations in the year 2022 from nine in 2000. Furthermore, the catch up for lower ranked nations in the post-Covid era will be a tougher ask, given the long-term scarring effects and output loss induced by the pandemic in addition to an already limited fiscal space and existing debt burdens.

As the global economy slowly recovers post-pandemic, it is contending with a lasting structural change: the accelerated adoption of digital technologies, which has resulted in societal gains such as higher labour force participation rates and productivity gains among others (especially in nations where the basic infrastructure was already in place). Despite challenges in data availability in this realm, this edition of the EDI includes indicators that aim to capture the growth of the digital economy: three digital-specific indicators are added to the trade sub-index.

Using this updated list of indicators and availability of data, a revised trade+ (“trade-plus”) sub-index is calculated for the years 2010-2022, for a subset of 106 countries. The revised trade+ sub-index is also used to calculate a digital augmented EDI+ (“EDI-plus”) score and ranking. Other than the Sub-Saharan Africa region, all regional groups improved their trade+ sub-index scores in 2020-2022. While the top four ranked countries are the same in both the trade and trade+ sub-indices, of the bottom 20-ranked nations in the original trade sub-index, thirteen are worse-off when including digital indicators. This finding is in line with what other studies have shown i.e. if adoption is delayed, existing digital divides can widen leading to deteriorating outcomes and prospects in the absence of an acceleration of reforms. South Asia shows a significant upwards jump in trade+ scores over time and this is reflected as well in the EDI+ scores as well.

A clear outcome across countries is that digital economy investments improve trade diversification, notably through the ability to export services. For commodity producers and exporters, the report finds that they can strongly improve their overall EDI and trade rankings by investment in and adoption of new digital technology and its services. Additionally, country geographical size does not appear to be an impediment to economic diversification and EDI scores (e.g. highly-ranked nations such as Singapore, Ireland and Netherlands among others are relatively small economies, both in the EDI and EDI+ versions).

Commodity producing nations are vulnerable to volatility in commodity prices. Prices can be more or less volatile depending on the type of commodity.  For instance, price of oil has been more volatile than the price of copper, wheat or cotton and other commodities, as shown by historical data. In the EDI sample of countries, more than 50% of the commodity dependent nations are reliant on fuels. The demand and supply shocks that occurred during the pandemic and those caused by ongoing wars, in addition to the planned energy transition to Net-Zero Emissions, increase the urgency for fossil fuel exporters to diversify – else these nations run the risk of being left with lower valued or stranded assets.

Sub-Saharan Africa’s commodity exporters posted the lowest EDI scores over time, with the 2020-2022 average score falling below the 2012-2015 period, underscoring not only the pandemic’s negative impact on performance but also the divergent paces of recovery. However, both the MENA and Eastern Europe & Central Asia regions reported a slight improvement in the 2020-2022 period versus pre-pandemic scores: these nations were all fuel exporters (i.e. not exporters of any other commodities). The report also finds that countries that reduced (increased) the share of resource rents have seen an increase (decline) in EDI scores, but the relation is one of correlation and not causation. Among the GCC, UAE and Bahrain have higher EDI scores compared to their peers, while Saudi Arabia and Oman have both gained over 10-points in 2020-2022 compared to their EDI score in 2000. Improvements in GCC scores have resulted from the implementation of reforms at a much more aggressive pace after the pandemic – including incentives to invest in new tech sectors, plans to broaden tax bases, trade liberalisation through free trade agreements and improvements to regulatory and business environment among others facilitating rights of establishment and labour mobility – that support diversification efforts and provide long-term economic resilience.

Lastly, the report highlights an increasingly relevant discussion related to climate change and the vulnerability of commodity-dependent nations. As countries adapt to and mitigate climate change risks, energy transition and “Green economy” investments, such as renewable energy, can play a key role in transforming economies and output structures. Fossil fuels are likely to remain in the global energy mix for decades, but a potential sustained decline in demand necessitates the roll-out of diversification policies at the earliest. With many oil-exporting nations in the Middle East already diversifying energy sources, potential export of clean energy from these nations could widen their export base (both in terms of products and trade partners). Furthermore, regional integration would aid diversification efforts of commodity producers and also provide a massive opportunity to link with domestic or regional value chains, adding to diversification efforts.

The article titled “Why nations must diversify their economies to avoid stagnation” appeared in the print edition of The National on 22nd February 2023 and is posted below.

Why nations must diversify their economies to avoid stagnation

Nasser Saidi & Aathira Prasad

The Global Economic Diversification Index tracks, measures and compares progress in diversification based on 25 indicators

Economic growth in nations with an abundance of natural resources tends to be lower and more volatile.

Diversifying activity from an over-dependence on natural resources — such as oil, minerals or commodities — allows countries to harness resource rents as an engine of growth, rather than a barrier to economic development, avoiding the “resource curse”.

For fossil fuel-dependent countries, ambitious global decarbonisation commitments (UN Cop climate summits, net zero emissions) and energy transition plans to address climate change have added to the urgency of economic diversification, given that oil and gas accounted for 31.89 per cent and 21.34 per cent of global greenhouse gas emissions in 2021.

With economic diversification a policy imperative in the Middle East, nations can turn to the Global Economic Diversification Index (EDI) to track their performance over time, undertake peer comparisons and measure the gap with higher-ranked nations.

The EDI identifies and examines 25 economic indicators, analysing and combining three main dimensions of diversification — output, trade and government revenue — across 105 nations for the period 2000-2021.

The top-ranked nations have maintained their standing over time, with the US, China and Germany ranking highest in 2021.

What are the major lessons and outcomes? First, there is a positive correlation between EDI and gross domestic product per capita (but being a high-income country does not imply a high economic diversification score) and, secondly, the higher the share of resource rents in GDP, the lower the EDI score.

Third, countries do not need to take a traditional industrialisation route: services and financial services led Singapore and Switzerland to rank highly alongside industrialised nations such as Germany and the UK.

Fourth, innovation and adoption of new technology is an essential ingredient for greater diversification, with many top performers also in World Intellectual Property Organisation’s [WIPO’s] Global Innovation Index, and, finally, size need not be an impediment to economic diversification (“small” Ireland, the Netherlands and Singapore rank high).

GCC economic diversification

While the non-oil sector has grown in the GCC, the oil sector continues to dominate, accounting for more than 40 per cent of GDP in most countries.

In the past decade, there has been a concerted effort to diversify revenue and support fiscal sustainability, with the introduction of VAT and excises taxes (with the UAE introducing corporate tax this year and Oman studying a proposal for income tax).

However, consumption taxes remain a small share of total revenue in comparison to oil and gas in the nations that have introduced VAT, while Qatar and Kuwait have yet to introduce consumption tax.

At present, trade is also heavily reliant on exports of oil and gas and their derivatives such as petrochemicals.

The coronavirus was a game-changer. To shift from over-dependence on commodities, the GCC (and others) have diversified into services-based sectors such as tourism, trade, logistics and transport. But these were affected in the initial Covid-19 year, leading to a reassessment of diversification strategies.

The pandemic has galvanised policymakers into action to support FDI flows, labour mobility liberalisation, privatisation and structural reforms.

Economic diversification 2.0

On the output side, there is greater opportunity in moving towards knowledge-based and innovation-led activities, creating space for private sector activity (especially in the tradables sector), and developing industrial policies and clusters, with local procurement strategies fostering job-creation at small and medium enterprises.

Incentivising policies supporting the diffusion of new technology (such as electric transport systems or robotics), alongside a push for investment into new sectors, including digital economy, clean energy and climate technology, and increasingly general purpose tech such as artificial intelligence, will also support diversification.

The continuing privatisation of state-owned assets and enterprises allows for the opportunity to “de-risk” fossil fuel assets, with the added advantage of raising revenue, developing and diversifying financial markets, and attracting both domestic and foreign investment and technology.

The pandemic underscored the need for trade diversification — both in terms of products and trade partners — and of supply chains.

The GCC will also benefit from the enactment of new “deep trade agreements”, including the broad category of services, such as digital services (e-services, e-commerce and digital finance), beyond the limited scope of trade in goods.

With the shift in global economic geography towards Asia, a China-GCC free-trade agreement (under negotiation since 2004) is a strategic priority, given that China is the main trade and economic partner of the region and would integrate the GCC into Asian supply chains.

Trade reforms, when complemented by structural reform, including in the labour market, will lead to greater skill diversity in the workforce, enabling mobility and lower transition costs, job creation and raising productivity growth.

Additionally, policy reforms will encourage private sector activity by lowering the costs of conducting business, thereby encouraging private and foreign investment, and promoting competitiveness and capital market development (including the development of a yield curve, a domestic corporate bond market), with a focus on climate finance and funding the green economy as part of energy transition policies.

Economic diversification leads to more balanced and stable economies, and is key to inclusive economic development and sustainable job creation.

The EDI is a tool that enables evidence-based policymaking and informs the design of strategy and policy measures, allows for the evaluation of policies’ impact and effectiveness, and enables monitoring of policy outcomes, as well as helps to identify problem areas. It enables policy research aimed at identifying strategies and policies that foster and those that hinder diversification.

Resting on current diversification achievements is insufficient. Commodity dependent nations need to sustain economic/structural reforms and innovate to catch-up faster with the frontrunners.

The Global Economic Diversification Index 2023 was released last week by the Mohammed Bin Rashid School of Government (MBRSG) at the World Government Summit. The report was developed in cooperation with Salma Refass and Fadi Salem (MBRSG) and Ben Shepherd (Developing Trade Consultants).

“Global Economic Diversification Index 2023” was released by the Mohammed Bin Rashid School of Government (MBRSG) at the World Government Summit held in Dubai on 14th Feb 2023. Dr. Nasser Saidi & Aathira Prasad were co-authors of the report, which  was developed in cooperation with Salma Refass and Fadi Salem (MBRSG) and Ben Shepherd (Developing Trade Consultants). 

Access the latest and past reports as well as the underlying data on the website. The report’s release was covered in newspapers like The National and Khaleej Times among others. 

Economic diversification has been a guiding policy theme for commodity producing nations to minimize volatility, support economic growth and development, create jobs. alongside greater private sector activity and more sustainable public finances. While research about economic diversification centers around its determinants and the impact of policies on economic development, there had been no agreed, available measure or index of economic diversification till the first edition of the Global Economic Diversification Index (EDI) was published in 2022. The EDI measures and ranks countries on the extent of their economic diversification from a multi-dimensional angle, exploring diversification of economic activity, international trade as well as of government revenues (away from a dependence on natural resource or commodity revenue).

The EDI is based solely on quantitative indicators, with no survey or perception indicators, providing a quantitative benchmark and ranking of the economic diversification of countries, using 25 publicly available indicators, data and information. This edition of the EDI extends the coverage to a total of 105 countries, for the period 2000 to the Covid19 affected 2020 and 2021, allowing an international, cross-country, regional comparison and ranking of commodity dependent countries.

The United States, China and Germany hold on to their top 3 positions in this edition of the EDI. Nations that rank 4th to 10th have only a 6-point difference between them, highlighting the strength of diversification among the highly ranked countries. Three oil producing nations continuously remain in the bottom 10 nations across the period, but the MENA region has recorded an improvement towards the latter part of last decade (supported by the acceleration of many oil producer’s diversification plans).

Overall regional rankings held steady even during the pandemic years (though the scores were much lower): North America topped the list while Sub-Saharan Africa remained a laggard. The analysis highlights that while commodity dependent nations have made gains in both output and trade diversification sub-indices over time, revenue diversification has been holding back overall advances for many. Tax revenue as a % of GDP in Norway, highly ranked in the revenue sub-index, stands at a high 30%+ and compares to single digit readings in countries like Bahrain, Iran or Kuwait, to name a few.

Within the GCC, UAE and Saudi Arabia have made the most significant economic diversification progress, thanks to a conscious effort to diversify into the non-oil sector. Following the onset of Covid-19, which put the brakes on non-oil sectors of focus (like tourism, infrastructure and logistics), there has been an accelerated shift in policies rolled out to enable economic transformation. This includes structural reforms (especially directed at the labour market and increased mobility), embracing the digital economy, efforts to broaden the tax base and a concerted push towards the privatisation of certain state-owned assets and enterprises to de-risk fossil fuel assets among others. This will support the next phase of economic diversification in the region.

“COVID-19 and its impact on Arab economic integration“, prepared by Nasser Saidi & Aathira Prasad, is available on UN ESCWA (United Nations Economic and Social Commission for Western Asia)’s website. 

The paper explores the impact of the COVID-19 pandemic on the Arab region’s global and regional economic integration. In terms of output, oil exporters faced a double whammy of lower domestic demand and supply shocks along with lower oil prices and exports, while tourism-dependent countries took a severe hit. The Middle East’s decline in international and regional trade was sharpest across all regions, and the decline in services trade was even harsher. With respect to labour, there was evidence of reverse migration alongside resilient remittances, but the recovery will be long for those in the informal sector, especially women and young people. Overall, the Gulf Cooperation Council (GCC) countries seem to be the main drivers of greater regional (and indirectly of greater global) economic integration, and Mashreq countries are becoming increasingly integrated with the GCC.

To enhance regional integration in a post-pandemic world, the Arab region needs to rethink its trade and investment policies (agreements with key partners in the GCC and Asia, reduce restrictions related to trade in services, strengthen links to the global value chain, and invest in digital trade), while allowing for greater mobility of labour and enhancing financial (and capital market) linkages. Moreover, policy coordination is paramount to address some of the common challenges facing the region, including mitigating the risks of climate change and food security.

In this interview with Al Arabiya aired on 5th May 2022, Dr. Nasser Saidi discusses the US Fed’s 50bps hike, additional risks to account for and the rate hike’s impact on MENA/GCC.

Watch the interview here.

ناصر السعيدي للعربية: تصريحات باول طمأنت الأسواق.. لكن يجب الانتباه إلى هذه المخاطر

أكد أن تأثير رفع أسعار الفائدة الأميركية سيكون واضحاً في المنطقة

قال رئيس شركة ناصر السعيدي وشركاه، الدكتور ناصر السعيدي، إن تصريحات رئيس مجلس الاحتياطي الاتحادي الأميركي جيروم باول، بخصوص الفائدة أمس الأربعاء، طمأنت الأسواق بأنه لن يكون هناك تشدد سريع، لكن سيتم تدريجيا رفع الفائدة وتخفيض محفظة السندات سواء سندات الخزينة أو السندات العقارية.

وأضاف السعيدي في مقابلة مع “العربية”، أن باول ذكر مجموعة من المخاطر التي لاتزال موجودة، حيث يجب الانتباه والوعي إليها، مثل مخاطر “كوفيد-19” على الصين والتي تؤثر بدورها على سلاسل التوريد عالميا، فضلا عن الحرب الروسية على أوكرانيا وتداعياتها على الاقتصاد الأوروبي، إضافة إلى معدلات التضخم المرتفعة.

وذكر أن الاقتصاديين وصلوا إلى قناعة بأن البنوك المركزية، خصوصا الفيدرالي الأميركي، قد أخفق بمعالجة مشكلة التضخم مع وصول معدلاتها إلى %8.

ولفت السعيدي إلى أنه مع تداعيات الحرب الأوكرانية، والوضع في الصين وغيرها، فإنه من الصعب أن يصل الاقتصاد الأميركي إلى “الهبوط الناعم”.

وقال إن تأثير رفع أسعار الفائدة الأميركية سيكون واضحا في المنطقة العربية، موضحا أن هناك فرقا كبيرا بين الدول التي تربط عملتها بالدولار مثل دول الخليج، وتلك التي لا تربطها بالعملة الأميركية.

In this interview with Al Arabiya aired on 12th April 2022, Dr. Nasser Saidi discusses the latest inflation figures in the US,  Fed policy and whether it could lead to an economic stagnation.

Watch the interview here.

قبل إصدارها رسمياً.. البيت الأبيض يفجّر مفاجأة بخصوص أرقام التضخم

توقع معدل تضخم “مرتفعاً بشكل غير عادي” خلال مارس

يتوقع البيت الأبيض أن يكون معدل التضخم لشهر مارس في الولايات المتحدة والذي سيُكشف عنه اليوم الثلاثاء “مرتفعاً بشكل غير عادي”، مرجعاً ذلك إلى ارتفاع الأسعار بسبب الحرب في أوكرانيا.

وقالت المتحدثة باسم الرئاسة الأميركية، جين ساكي، خلال مؤتمر صحافي: “نتوقع أن يكون تضخم مؤشر أسعار المستهلكين في مارس مرتفعاً بشكل غير عادي بسبب غلاء الأسعار الذي تسبب فيه الرئيس الروسي، فلاديمير بوتين”.

وأضافت أن البيت الأبيض يتوقع “اختلافاً كبيراً” بين معدل التضخم العام ومعدل التضخم “الأساسي” الذي يستثني أسعار الطاقة والنفط التي ارتفعت منذ بدء الغزو الروسي لأوكرانيا.

ويعتزم الرئيس الأميركي جو بايدن، الحديث حول هذا الأمر اليوم، خلال زيارة إلى ولاية إيوا ستركز على هذه المسألة بشكل خاص، وفقاً لما ذكرته “فرانس برس”، واطلعت عليه “العربية.نت”.

وكان معدل التضخم مرتفعاً أصلاً في الولايات المتحدة قبل أن يتفاقم في فبراير مع بدء الحرب في أوكرانيا.

وارتفعت أسعار المستهلكين بنسبة 7.9% على أساس سنوي في فبراير، وهو مستوى غير مسبوق منذ عام 1982، وفق مؤشر أسعار المستهلكين الذي تعدل على أساسه الرواتب التقاعدية.

ومن المنتظر أن يتسارع معدل التضخم في مارس الذي سيكون أول شهر يعطي صورة كاملة لتداعيات الحرب في أوكرانيا على الأسعار في الولايات المتحدة.

ومن المتوقع أن يبلغ معدل التضخم على أساس شهري 1.2%، مقارنة بـ0.8% في فبراير.

أما معدل التضخم “الأساسي”، فمتوقع أن يستمر عند المعدل الحالي البالغ 0.5%، ما يؤكد أن ارتفاع الأسعار يتركز في قطاعي الطاقة والغذاء.

فيما يحذر الاقتصاديون من أن التضخم لن يتباطأ قبل أشهر عدة.

ولمواجهة ذلك، بدأ الاحتياطي الفيدرالي رفع أسعار الفائدة الرئيسية في منتصف مارس ما يرفع من تكلفة الاقتراض، وهو ما من شأنه أن يبطئ الاستهلاك والاستثمار لتخفيف الضغط على الأسعار.

وفي غضون ذلك، أكد المركزي الأميركي أنه سيواصل تشديد سياسته النقدية في الأشهر المقبلة.

وقال رئيس شركة ناصر السعيدي وشركاه، ناصر السعيدي، في مقابلة مع “العربية”، إن البنك المركزي الأميركي تأخر في وقف السيولة التي يضخها في الأسواق.

وأضاف السعيدي أن الفيدرالي أراد التأكد من تعافي الاقتصاد الأميركي قبل سحب السيولة أو رفع الفوائد.

وأشار إلى أن بيانات الربع الأخير من 2021 تظهر تعافي الاقتصاد الأميركي مع تراجع نسبة البطالة لأدنى مستويات في 5 سنوات، ولكن تفاقمت أسعار التضخم التي كانت تتطلب تدخلا فوريا من الفيدرالي.

In this interview with Al Arabiya aired on 1st Mar 2022, Dr. Nasser Saidi discusses rising inflationary pressures amid the war in Ukraine, how it could affect the Fed’s rate decision and whether it could lead to an economic stagnation.

Watch the interview here.

لهذا السبب سيتأخر الفيدرالي الأميركي برفع الفائدة

توقع ركوداً اقتصادياً يصاحبه مستويات تضخم مرتفعة

توقع رئيس شركة ناصر السعيدي وشركاه، الدكتور ناصر السعيدي، أن يكون هناك أثر سلبي على السيولة العالمية، نتيجة الأزمة الروسية الأوكرانية الحالية، موضحاً أنه لهذا السبب سيتأخر الفيدرالي الأميركي برفع الفائدة، أو حتى إذا رفعها ستكون أقل من 50 نقطة بين 20 إلى 25 نقطة.

وأشار السعيدي في مقابلة مع “العربية” إلى أن نسب التضخم في أميركا، زادت إلى أعلى المستويات، حيث وصلت إلى 7% والتي تعد الأعلى منذ 40 سنة.

وأضاف أن الأوضاع في الأسواق المالية ترجح أن عدم توفر السيولة يمكن أن يؤثر سلبا، ولهذا لن يرفع البنك الأوروبي أو الفيدرالي الفوائد بسرعة.

وذكر السعيدي أن سيناريو (حالة الركود الاقتصادي الذي يصاحبه مستويات تضخم مرتفعة)، بات أكثر واقعية حاليا مع ارتفاع أسعار المواد الأولية، لاسيما النفط والقمح وغيرهما من السلع، لافتا إلى أنه مع كون أوكرانيا من أكبر المصدرين للقمح في العالم، فإن ذلك سيؤثر على معظم المواد العذائية.

وقال إن التحالف النفطي مع روسيا سيستمر، مشيرا إلى أن “أوبك بلس” لن تهتز من هذه الناحية، كما رجح ألا يكون هناك زياد في إنتاج النفط وتصديره.

وتوقع السعيدي أن تقوم الولايات المتحدة وبعض الدول باستخدام المخزون النفطي الذي لديها (الاحتياطيات الاستراتيجية)، خصوصا في أميركا وأوروبا.

In this interview with Al Arabiya aired on 27th Jan 2022, Dr. Nasser Saidi discusses the Fed’s rate decision and what this means for growth in light of the rising inflation. How this transition would affect emerging markets is also important.

Watch the interview here.

Dr. Nasser Saidi’s comments appeared in an Arab News article titled “2021 Year in Review: New coronavirus variant, inflation test strength of global economic recovery” published on 30th December 2021.

The comment is posted below.

Nasser Saidi, Middle East economic expert, said: “Unless the vaccination pace improves drastically (especially in low-income nations) and the new variant is rapidly brought under control, the global economy could see brakes applied on growth at least in the first quarter of next year.”

In this interview with Al Arabiya, Dr. Nasser Saidi discusses risks facing financial markets in 2022: continuing COVID19 effects, geopolitical, monetary tightening, higher interest rates, inflation uncertainty & volatility & their impact on corporate earnings

Watch the interview and read the article (in Arabic) that was published on 21st December 2021, and is posted below.

هذه العوامل ستحدد وجهة الأسواق العالمية والنفط في 2022

قال الدكتور ناصر السعيدي، رئيس شركة ناصر السعيدي وشركاه، إن الأسواق ستتأثر خلال عام 2022، بمتحور أوميكرون خاصة في أوروبا وأميركا، إضافة إلى مخاطر التغير في السياسات النقدية، والتي تعتبر أهم بكثير من متحور أوميكرون.

وأضاف “خلال الـ20 شهر الماضية، ضخت البنوك المركزية 23 تريليون دولار، ما يمثل ضخ 800 مليون دولار كل ساعة، وهي أرقام ضخمة وقد أدت إلى ارتفاع الأسواق والقيم، وعدم ضخ سيولة سيكون أهم العوامل التي ستؤثر في حركة الأسواق خلال 2022”.

ويرى السعيدي أن الأسواق لم تعد تعتمد على الحكومات والبنوك المركزية لضخ سيولة، ونتيجة هذا سيكون هناك تشدد نقدي داخل الأسواق المالية، إضافة إلى تأثر الأسواق بمجموعة من المخاطر الجيوسياسية مثل تلك التي بين الصين وتايوان من جهة أو بين روسيا وأوكرانيا من جهة أخرى.

Dr. Nasser Saidi joined as a panelist in the session titled “Digitalization and the Future of Global Economy”, at the Eight Annual Abu Dhabi Strategic Debate organised by the Emirates Policy Centre on 14th November 2021.

Watch the full session below from 10:13 till 1:21:24:

Dr. Nasser Saidi joined Manus Cranny on the 18th of April, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the state of the US economy bond markets brushing off strong US data, inflationary pressures, views on cryptocurrencies/ Bitcoin/ SPACs as well as Chinese Q1 GDP and emerging market valuations.
Watch the interview below – Dr. Nasser Saidi joins from 05:30 till 19:10. The original link to the full episode: https://www.bloomberg.com/news/videos/2021-04-18/-bloomberg-daybreak-middle-east-full-show-04-18-2021-video
A quote from the interview also appeared in a news article:
“At the global level, you have both China and the U.S. growing fast. That’s driving markets across the globe,” Nasser Saidi & Associates president and founder Nasser Al-Saidi told Bloomberg.
“The simultaneous rally in stocks and bonds is temporary, but it suggests confidence in continued central bank support and “no fear of rapid inflation ramping up,” he added.


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The IMF issued its latest Regional Economic Outlook for the Middle East region this week. Real GDP for the Middle East and North Africa (MENA) region is forecast to grow by 4% this year (up 0.9 percentage points from the projection in Oct 2020) after having slumped by 3.4% in 2020 (vs an estimate of a 5% drop in the Oct 2020 edition). Growth outcomes and prospects will still be centred on how the pandemic progresses in the region amid the pace of vaccination rollouts.
The MENA region is now home to more than 7mn confirmed cases, with Iran the single largest contributor (share of close to 30%) and the GCC accounting for nearly 25%. Infections have been ticking up in the region since the start of this year. This has resulted in increased targeted restrictions and lockdowns in many a nation.
The chart compares the pace of vaccination and new cases. Vaccination pace is picking up in the region: the UAE leads the pack, having disbursed a total of 9.16mn doses as of Apr 13^th. With the supply of vaccines increasing (thanks to COVAX facility and donations from the UAE, Russia, China etc.), new vaccinations (black dots in the chart) have improved in most nations (compared to early Feb, marked in red). The production of vaccines domestically in the region will also boost supply later this year: UAE plans to manufacture Hayat-Vax, Egypt has an agreement with Sinovac Biotech, and Algeria will produce Sputnik-V from Sep onwards).
Meanwhile, reported cases are also higher compared to early Feb – many countries are now outside the small quadrant on the bottom-left of the chart. Depending on how fast vaccinations can lead to herd immunity will determine recovery paths – especially so in the more tourism-dependent nations (e.g. Egypt, Jordan, Lebanon).
However, policy measures introduced to support the economy during the pandemic is creating immense fiscal strain. Fiscal deficits widened to 10.1% of GDP in 2020 in the MENA region from 3.8% in 2019. It was severe in the GCC as well: fiscal deficit widened to 7.6% of GDP last year (2019: -1.6%), as the impact was from both lower oil and non-oil revenues. The fiscal breakeven price this year ranges from a high USD 88.2 in Bahrain to a low USD 43.1 in Qatar. While, it is expected to decline across the board next year, it still remains higher than the current oil price levels for most nations. Given new rounds of restrictions and with oil demand not yet at pre-pandemic levels, the OPEC+’s recent decision to roll back production cuts are likely to depress oil prices. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable.
With business operations and revenues affected due to the pandemic alongside weakened domestic demand, non-oil revenues as a share of non-oil GDP declined in 2020: Saudi was the sole exception, given its VAT hike to 15% from Jul 2020. Oman is expected to witness a significant boost in non-oil revenues this year, with the introduction of VAT from Apr 16th. Oil exporters in the region are still highly dependent on oil revenues, as is evident from the large non-oil fiscal deficits in the GCC. In 2021, it is forecast at a high 72% in Kuwait and an average 30.9% and 29.9% in the GCC and MENA oil exporters respectively.

Higher deficits and negative economic growth resulted in governments resorting to multiple financing options: borrowing from commercial banks, tapping international and regional markets (bond issuances, commercial loans) as well as drawing down from international reserves at the central banks/ sovereign wealth funds. Government debt levels increased to 56.4% and 41% in the MENA and GCC regions last year. Though it is forecast to fall slightly this year, it still remains higher than the 2000-17 average of 36.2% and 24.6% respectively. The IMF estimates financing needs in the MENA to touch USD 919bn for this year and next. Public-financing requirements were likely to stay above 15% of GDP in most parts of the region through end-2022.
This could pose a significant risk in the coming years: (a) sectors affected by the pandemic are being supported by government policy stimulus. When this support is rolled back eventually, this could result in bankruptcies, defaults and job losses, further causing an increase in banks’ non-performing loans; (b) global financial conditions have been quite accommodative and so long as cost of capital remains low, there will be an appetite for borrowing and even refinancing maturing debt. However, a faster-than-expected global recovery could lead to interest rates hikes, push long-term rates and funding costs higher, increase sovereign spreads, thereby tightening financing conditions – affecting countries with large external financing needs (and their indebted corporates). Though GCC’s sovereign debt levels are relatively low, over USD 100bn is expected to mature in 2021-25.
 
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Chart 1. Inspite of battling new Covid19 restrictions, PMIs run high

• Global manufacturing PMI touched a 10-year high in Mar: the uptick happened inspite of increased restrictions in late-2020/ early 2021, suggesting less severe impact of the recent lockdowns vs. the one in Apr-May.
• Preparedness for disruptions to production & supply chains as well as online demand & delivery likely improved.
• However, overall conditions are still affected by supply chain disruptions and inflationary pressures.
• Global Services PMI grew to a 33-month high of 54.7 in Mar, supported by inflows of new work.

Chart 2. Optimism spills over into IMF’s growth forecasts amid uneven recovery caution

• The IMF projects 6% yoy growth in 2021, up from the 3.3% contraction last year. If the forecast is realized, it would mark the fastest rate of global growth since 1976. While China returned to pre-pandemic GDP levels in 2020 itself (+2.3%), many are unlikely to recover till 2023 – depending on new virus variants, pace of vaccination rollout and extent of fiscal/ monetary stimulus.
• The average medium term output loss over 2020-24, relative to pre-pandemic forecasts, is projected to be 6.1% in low-income countries versus 4.1% and a smaller 0.9% in emerging and advanced nations respectively. This is much lower than the losses seen during the 2008-09 financial crisis (when advanced nations suffered the most).
• The Middle East’s growth forecasts have remained broadly unchanged though recovery prospects of the GCC (where vaccination pace is quite high) are miles apart from many of the war-torn nations.

Chart 3. Merchandise trade poised for recovery in 2021, before slowing in 2022: WTO

• Strong, but uneven recovery is the story in merchandise trade volumes as well. Trade volume is projected to increase by 8% this year and then slow to 4% in 2022. Cross-border trade in services remains subdued and new waves of infection could easily reverse course of trade.
• Falling oil prices led to a 35% contraction in trade in fuels in 2020: it had a significant impact on Middle East exports (-8.2% slump in 2020), also resulting in a massive 11.3% plunge in imports. As travel picks up post-vaccine drives, demand for oil will likely strengthen, causing a 12.4% rise in exports in the Middle East this year.
• Asia, the export hub: the region’s limited impact and faster recovery from the virus + supply of medical supplies & consumer goods supported their export growth last year. This will enable the 8.4% rise in exports this year.

Chart 4. Risks to the Rosy Outlook

• Pandemic-related risks:
  • New strains of vaccine-resistant Covid19 => prolonged pandemic
  • Highly unequal global roll out of vaccines could reverberate on advanced nations, when lockdowns are relaxed
  • Supply chain disruptions: one leading COVID-19 vaccine includes 280 components sourced from 19 different countries. Any constraint would impact production and distribution
  • Insufficient production of vaccines + vaccine nationalism affecting global rollout of vaccines
• Financial risks:
  • Avoid a repeat of 2013 “taper tantrum”. Rise in US rates => repricing of risk + tighter financial conditions => negative impact on highly leveraged nations/ businesses (heavy borrowings in 2020, supported by low interest rates: EMEs borrowed 9.8% of GDP & low-income nations 5.5%)
  • Impact of corporate sector when stimulus measures are rolled back: potential bankruptcies/ insolvencies (& job losses), profitability => financial risks & effect on banks’ bottom line
• Long-lasting effects from the pandemic:
  • Poverty: an additional 95mn people likely entered the category of “extreme poor” in 2020 versus pre-pandemic projections => rising food prices & social unrest (Lebanon as an example)
  • Labour markets: youth, women & low-skilled workers more affected + impact on productivity
  • Inequality within nations & across economies: not limited to income. Think education, technology
• Climate change risks: methane & CO2 levels surged to record amounts in 2020 + stranded assets + preparedness for a low-carbon transition
• Geo-political risks:  US-China tensions led suppliers to shift away from China (one of the reasons behind the current shortage of computer chips), reshoring and “Made at home” policies

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Chart 1. Saudi Arabia’s Shareek investment package to jumpstart the economy

• The Shareek strategy (SAR 27trn stimulus over the coming decade) aims to jumpstart and shift expenditure patterns post-Covid by emphasizing investment vs consumption spending (incl.govt current spending), while implementing diversification. As proposed, the plan should be strongly supportive of non-oil growth, increase overall productivity growth and lead to job creation. 
• Jobs are one of the biggest concerns for the country: female unemployment was running close to 50% for the 20-24 age group in Q3 & close to 20% for males in the same age group. It has come off highs earlier in 2020, but remains one of the highest in the region
• FDI has improved massively from the fall to USD 1.4bn (0.2% of GDP) in 2017; according to the Saudi Central Bank’s estimates, overall FDI reached USD 5.49bn in 2020 (+20% yoy, still below 1% of GDP).
• Saudi Arabia has been aggressively courting foreign investors: revamped over half of the 400 FDI regulations, introduced new laws (e.g. bankruptcy, PPP) and recently stated that presence of firms’ regional HQs in Saudi would become a necessary condition to bid for government contracts.
• FDI inflows would be directed away from oil & gas into more job creating & higher value-added sectors (e.g. renewable energy and clean tech, ‘clean’ petrochemicals, desert agriculture & AgriTech, digital economy).  Potentially, this revival of investment  and a successful program could attract back a fraction of Saudi private wealth held offshore (estimated at 56% of GDP).

 
Chart 2. Monetary indicators in Saudi Arabia: PoS & e-commerce transactions and claims on the private sector rise in Feb


 
Chart 3. Overall GDP in UAE contracted by 7.4% yoy in Q2 2020; recovery expected in H2

• New data: Non-oil GDP fell by 9.9% in Q2 2020, following a 1.9% decline in the previous quarter. Finance and insurance was the lone sub-sector to post growth in Q2.
• Stringency was the highest and mobility lowest in Q2. Mobility data shows improved activity in H2 of 2020, which bodes well for GDP. UAE’s PMI, which averaged 50.2 in H2 2020 (vs 47.1 in Q2 and 47.5 in H1), also indicates a faster recovery in H2. Faster vaccination rollout and the Expo later this year will result in increased consumer and business confidence.
• With an aim to grow faster in the post-Covid world, the UAE has been proactively announcing reforms: with the latest industrial strategy (“Operation 300bn”), Dubai’s 5-year plan to increase trade to AED 2trn and its 2040 urban development plan alongside various incentives to attract high-skilled professionals (10-year visas, remote working visas, path to citizenship etc.)

 
Chart 4. Q3 GDP data from other GCC nations suggest better quarters ahead for the UAE – the least restrictive of all

While overall % yoy GDP improved in Q3, some sectors (including oil, given OPEC+ cuts & others like trade, hospitality) contracted even more

 
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Dr. Nasser Saidi joined Manus Cranny and Yousef Gamal El-Din on the 28th of March, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the blockage of traffic in the Suez Canal and the fragility of global supply chains, how the US should focus on getting the economy going again and Covid19 risks rather than focusing on inflation, and how the China-US confrontation is affecting market sentiment.
Watch the interview below. The original link to the full episode: https://www.bloomberg.com/news/videos/2021-03-28/-bloomberg-daybreak-middle-east-full-show-03-28-2021-video


Download a PDF copy of this week’s insight piece here.
 
Chart 1. Covid19 cases in the Middle East continue to rise at a varied pace

• The GCC nations account for one-fourth of the cases in the MENA region. On a per million basis, cumulative Covid19 cases are high in Bahrain and Lebanon. The total number of confirmed cases have doubled in 72 days in Lebanon, 76 days in UAE and 267 days in Saudi Arabia (vs global average of 117 days).
• Where Covid19 cases are still high, economic activity will be relatively softer in Q1 2021. Many nations, including the UAE, saw an uptick after the December end-of-the-year holidays. Saudi Arabia and Egypt are faring better in spite of the recent increase in cases.

 
Chart 2. Will life return to normal after vaccination? Pays not to be complacent

• The vaccination rollout is expected to reduce the pace of number of new infections.
• The UAE, which has one of the fastest rollouts of the vaccines globally, has seen a significant reduction in infections.
• Though breakdowns by age or hospitalizations are not available in the UAE, improvements for the vaccinated elderly population was a clear result in the case of both UK and Israel – the closest to UAE in terms of vaccine rollout numbers.
• Last week, UAE announced that vaccines had been administered to 70.21% of the elderly and people with chronic conditions and to over 50% of the population. For now, extra precautions are still being adhered to in the UAE (its stringency index is close to 55) with Ramadan around the corner.
• With cases ticking up in neighbouring India (test positivity rates are now doubling every five days in several states) due to a new variant with two mutations and easing of lockdown restrictions, and Europe’s delayed vaccine rollouts amid rising case of infections, it would be prudent for the UAE to remain cautious till herd immunity is achieved (given its relative openness).

 
Chart 3. With the Stringency Index near the half-way mark, mobility has been improving

• Mobility – a proxy for economic activity – has improved across the board from pandemic lows.
• Mobility indicators indicate a strong negative relation with the Stringency Index: the tighter the government-imposed restrictions, the stronger is the observed reduction in mobility. Stringency index is around 55 in the case of Egypt, Saudi Arabia and the UAE.
• While retail and recreation mobility remains below pre-pandemic levels given the restrictions on capacity, grocery shopping seems to have gone back to pre-Covid levels in Egypt though not as much in UAE and Saudi Arabia – potentially a result of the rise in e-commerce offerings in this space.

 
Chart 4. Hotel occupancy levels supported by domestic tourism and few travel corridors

• Middle East’s hotel occupancy rates were the highest on a rolling 7-day average ending with 7 Feb (50.4%) as residents opted for domestic tourism vs international travel (STR Global).
• As can be seen from the chart, a brake was applied on China’s fast-paced recovery with this year’s wave of Covid19 cases, which also affected the busy Chinese New Year travel period.
• The Middle East & UAE saw total-year hotel occupancy & revenue per available room levels fall to all-time lows in 2020.
• The performance towards end of the year was closer to pre-pandemic levels, thanks to the New Year holidays and ease in restrictions (including travel corridors). Dubai posted a 76% occupancy level in the week ending Jan 3rd, followed by Al Khobar & Dammam (72%), Abu Dhabi and Jeddah (at 62%)
• Markets that are likely to see faster paced recovery are UAE and Saudi Arabia, given government initiatives and policy support
• UAE will be helped by its relatively lower stringency levels, hosting of the Expo later this year as well as its recent announcement of multi-entry visit visas. Rollout of the IATA Travel Pass/ digital health passports will support recovery. Vaccine tourism is also a possibility.
• Saudi Arabia will benefit, with its relatively low number of cases, as it resumes religious tourism alongside its ambitious tourism plans (186 projects/66,866 rooms were in the construction pipeline at end-2020).

Chart 5. Passenger traffic likely to remain subdued; but with some silver linings

• Air travel has been negatively impacted by the new round of travel restrictions. Asia has the most stringent controls related to air travel (closed to many regions) & the Middle East the least (quarantine for arrivals for high-risk regions).
• Passenger activity in the Middle East was 72.2% yoy lower in 2020; in Jan, it was 82.3% lower than pre-crisis Jan 2020. A breakdown by routes show the sharpest drop in the Middle East-Asia sector last year (-73.7%)
• As vaccinations increase in the Middle East, the demand for international travel will pick-up, given pent-up desire to travel and high individual savings rate
  • Given the expat population in the region, travel to “leisure” destinations is likely to pick up (so long as their source nations are still under pressure from Covid19 cases).  Anecdotal evidence points to UAE residents opting to visit Seychelles and Maldives during the upcoming school break (India is facing a new wave of Covid cases, UK has a mandatory hotel quarantine etc…)
  • There is also a potential of increased visits from grandparents: being the first ones to get vaccinated, evidence already shows an uptick in airline bookings among the 65+ year olds in the US making up for missed family visits during 2020. Likely to benefit the Middle East nations, especially the UAE.

 
Chart 6. Air cargo levels rebound to pre-pandemic levels; UAE hubs support vaccine deliveries

• A recovery in export orders from Covid19 lows implies that the recovery in air cargo services has rebounded much faster vis-à-vis passenger traffic. However, lack of capacity (-18.7% yoy in Nov-Jan) is still a constraint.
• Middle East-North America and Middle East-Asia are two of the strongest trade lanes globally.
• Middle East’s volumes (measured by cargo tonne km flown) regained pre-crisis levels in Jan, with CTKs 2.2% yoy higher than Jan 2019.
• Though cargo revenues are growing stronger, these are unlikely to offset the loss of passenger revenues.
• UAE’s Emirates SkyCargo has flown more than 27,800 cargo flights to deliver medical and food supplies to communities hit by Covid19. It also signed an agreement with UNICEF in Feb to transport critical supplies like Covid19 vaccines, medicines and medical devices.
• In Mar, Abu Dhabi Ports and the Hope Consortium revealed the largest vaccine distribution centre in the Middle East – a 19k square metre temperature-controlled warehouse with a capacity to hold 120mn+ vaccines – which serves as a hub for vaccine distribution in the MENA, Africa and South Asia.

 
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Dr. Nasser Saidi’s comments appeared in an Arab News article titled “Prolonged crisis of governance leaves Lebanon adrift and isolated” on 13th March 2021.
The comments are posted below.
…the latest lockdown has all the trappings of the final straw.
“None of this is surprising,” Nasser Saidi, Lebanon’s former economy and trade minister, told Arab News.
“Income is down. GDP is down by at least 25 percent. We’re having inflation in excess of 130 percent; general poverty is over 50 percent of the population; food poverty is over 25 percent of the population; unemployment is rapidly increasing; and thousands of businesses are being shut down.
“All of this is coming to the fore and at the same time we have a lockdown. It was a very stupid decision the way it was done, to lock Lebanon down, because it prohibits people from even being able to go and get their groceries, their food and necessities. And then it meant also shutting down factories and manufacturing.
“If you get sick, you can’t even get to a hospital or afford a hospital. Hospitals are full now due to COVID-19. You have had a series of very bad decision-making and policies, and Lebanon is paying the price for it. This is going to continue. It is not going to go away. In my opinion, we are seeing just the tip of the iceberg.”
 

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Chart 1. Will vaccines give a jab to growth?

• PMI readings for both Saudi Arabia and the UAE eased moderately in Feb 2021.
• An uptick in Covid19 cases since beginning of this year, in both UAE and Saudi Arabia – at vastly different levels – led to more restrictive measures (likely to remain till Ramadan in mid-Apr)
• UAE’s stringency index increased to 56.3 in Feb vs Jan’s 50 & seems to have spilled over in weaker demand, thereby hampering sales and new orders growth. Though near-term outlook is uncertain, businesses optimism was decidely higher for the 12-months ahead period, potentially due to the fast pace of vaccination rollout and the upcoming Expo event

Chart 2. Saudi Arabia: Riding the digital wave

• Proxy indicators for consumer spending (ATM withdrawals & PoS transactions) continue diverging; recent restrictions on gatherings / entertainment will likely affect overall spending for Feb
• E-commerce received a jumpstart during the pandemic period: number of transactions picked up by 400% yoy in 2020 & sales value up by 341.2%. This compares to year 2017, when only 38.5% (of those aged 15+) had used the internet to pay bills or buy something online and just 25.7% had used mobile phone or internet to access an account (Source: Global Findex database)
• Overall loans picked up in the country, with loans to both the private and public sector rising around 15% and 18% respectively in Jan, after posting increases of 13% and 18% in 2020

 
Chart 3. UAE bank loans: where’s the appetite?

• About 70% of UAE banks’ loans went to the private sector as of end-2020, with the public sector & government together accounting for ~30% of all loans
• Overall, the surge in lending to GREs and the government – at 16.1% yoy and 19.8% respectively – in 2020 contrasted the drop in lending to the private sector (-1.0%)
• The uptick in loans towards agriculture surged by 106.6% yoy at end-Dec 2020, following increases of 8.7% and 25.5% respectively in Jun and Sep 2020, underscoring the focus on food security and evidence of investments into vertical farming and agritech companies (its share of total loans is just 0.13%).
• Loans to construction sector (accounting for ~20.5% of total loans) ticked up by 5.2% yoy as of end-Dec (vs 0.2% drop in 2020); personal loans for consumption (~20.4% of total loans) dipped by 1.3% as of end-Dec

 
Chart 4. Growing Pains: UAE’s SMEs amid Covid19

• The share of SME lending in total domestic lending remained unchanged at 5.7% in Q3 (Q2 2020: 5.7%),though lower than 5.9% share as of end-Q1
• Within the MSME segment, as of end-Q3, the largest share of loans was disbursed to medium-sized firms (57.3%) and close to 1/3-rd to the small enterprises
• The number of MSMEs in the UAE declined by 8.5% qoq to 114,361 as of end-Sep. This drop was visible across all 3 segments, with small enterprises plunging by 13.7% qoq as of end-Sep (Jun: +5%) and micro and medium enterprises down by 3.7% and 2.6% respectively
• With total lending remaining almost stable alongside a sharp drop in number of MSMEs, the amount disbursed per firm increased across the board at end-Sep: overall by 9.2% qoq while amounts to micro, small and medium firms grew by 4.8%, 13% and 3.8% respectively
• Banks’ provisions for bad and doubtful debts amounted to USD 42.5bn as of Dec 2020, up from USD 36.1bn at end-2019. With a large number of MSMEs dropping out of business, expect non-performing loans to tick up & eat into banks’ profitability

 
 
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It is no secret that the GCC is home to one of the largest migrant communities globally. Five MENA nations feature in the top 20 migrant attracting nations globally (by number of persons). Expat share in population across the GCC varies from Saudi Arabia’s less than 40% to UAE’s high 88%. According to the UN, top 20 migration corridors from Asia and Africa include those to the GCC nations: in 2019, India-UAE was the second-largest migration corridor in Asia (but, second only to refugee movement from Syria to Turkey), while migration from Egypt to Saudi and UAE occupied the top 5^th & 6^th spots among African nations.
Burdened by Covid19 and lower oil prices last year, job losses in the GCC and return migration has raised key concerns about the sustainability of dependence on expatriate labour. With published monthly data of labour/ employment lacking in most GCC nations, reliance on anecdotal evidence is high. Official NCSI data showed that more than 270k expats left Oman between end-2019 to Nov 2020 (roughly 16%). This Covid19-related “expat exodus” coupled with recent moves to nationalize various professions and replace expats with nationals in senior positions at state-run firms, highlight a growing predicament facing many GCC nations – how does a government justify the need to hire expatriate labour amid rising youth unemployment levels?

This pressure is building up in nations with high shares of population under the age of 25. Depending on labour force participation rates, the IMF estimates that the GCC labour force could grow by an additional 2.5mn nationals by 2025. While similar numbers are more intense in the labour-exporting nations within the MENA region, needless to say that there are some common challenges: job creation (in the private sector), gender disparity, preference to wait for a public sector job, address low levels of efficiency and productivity, to name a few.

• An interesting statistic from the ILO, namely young people not in employment, education or training (NEET) is at a high 16% in the GCC nations (though it pales in comparison with 40% in non-GCC Arab nations) implies that job creation has not been keeping pace with the growth in youth workforce.
• Gender disparities are a commonly acknowledged drawback in the GCC (and wider MENA region). The World Economic Forum’s Gender Gap 2020 report highlighted that it would take the MENA region close to 140 years to achieve gender parity! The Covid19 pandemic throws another spanner in the works with women being more negatively affected on the job front (globally and in the region). Whereas formal education attainment has improved over the years, issues of mobility, cultural norms/ gender roles continue to be significant barriers preventing women from joining the workforce. Even the previously mentioned NEET levels are much higher for women: in 2019, 51.9% of young women in Arab states were classified as NEET vs 17.8% of young men.
• In the GCC nations, labour markets remain segmented: wage premiums in the public sector for lower working hours drives the nationals’ preference for public sector employment. However, the higher wage bills (a strain on government budgets) have not translated into an improvement in the quality of public services (UAE is an outlier) and some standalone studies have highlighted a stagnation in public sector productivity levels.

Remittances in the GCC: should they be taxed?

According to the World Bank, outward remittances from the GCC touched USD 112bn in in 2019: while this was a drop of 6% yoy, as a share of GDP it still stood at 11.9% in Oman, 11% in Kuwait and 10.7% in the UAE. Together, UAE and Saudi Arabia account for more than 2/3-rds of total remittances from the GCC. Did the pattern of remittances change during the Covid19 pandemic? The combined effect of the pandemic and related job losses alongside lower oil prices were expected to have an adverse effect on remittances. The World Bank expects global remittances to drop by 7% yoy to USD 666bn in 2020 (and by a further 7.1% in 2021) and inward remittances into the MENA region to decline by 8.5% to USD 55bn in 2020 (and by 7.7% to USD 50bn in 2021) negatively affecting labour exporting countries like Egypt.

At the GCC level, quarterly (headline) data are available in Saudi Arabia, UAE and Kuwait. Saudi Arabia has witnessed a continued drop in remittance flows consistent with the oil price declines (it saw 12 straight quarters of yoy declines since 2017), alongside the introduction of nationalization policies in many sectors. While the drop in Q2 was consistent across all three nations, both Saudi and UAE reported an increase in remittances in Q3 (Kuwait is yet to release Q3 data). This could be a result of multiple factors: job losses resulting in transfer of savings to the home country, an increase in digital remittances (versus unrecorded cash during trips home), transfer of excess savings (given lack of travel, leisure activities), exchange rate movements and/ or remittances to support families in the home country. The World Bank identified a potential (yet to be evaluated) “Hajj effect” when analyzing remittances into Pakistan and Bangladesh – savings that had been set aside for Hajj were sent home instead given travel restrictions and the reduction in the issuance of Hajj visas.
Should remittances be taxed?
While there have been sporadic calls for a tax on remittances, this has yet to take a credible form and is oft refuted by government/ central bank officials. Oman is currently studying a proposal for a personal income tax on high-earners – if introduced, it will be a first in the region and could see similar rollouts across the region (depending on its impact). Though this will raise a question of “taxation without representation”, there are other approaches to encourage expats to retain their saving and invest in the economies (versus investing in their home country). This essentially boils down to a combination of labour and financial market reforms. Here is a non-exhaustive list.    

• Economic diversification into job-creating non-oil sectors (including knowledge-based sectors). This also requires a supportive business environment with the necessary legal framework to ease the cost of doing business as well as additional measures to support SMEs (supporting entrepreneurs)
• Allowing 100% foreign ownership would encourage FDI inflows, create jobs and prompt entrepreneurs and businesses to re-invest into the domestic economy
• Increased labour mobility: a rollout of residency visas versus job-linked visas would encourage expats to stay longer, thereby encouraging investments in the domestic economy (e.g. UAE’s 10-year visas for skilled professionals). Similarly, undertaking pension reforms as well as introducing unemployment insurance schemeswould help retain workers and reduce turnover and training costs.
• Encouragement of investment of domestically mobilized savings in the local economy needs the backing of a deep, broader and more liquid financial market. The introduction of a housing finance/ mortgage market could be one of the ways in addition to facilitating investment in domestic equity/ debt markets.
• Programs for capacity development to resolve skill mismatches via vocational and on-the-job training programs
• Supporting increased participation of female workforce through paid maternity/ paternity leaves and access to childcare facilities. Encouraging women to work increases growth and productivity, not only because women jobseekers typically have higher than average education, but also because this can increase mobility across sectors and jobs and increase household earnings, thereby increasing consumption and investment in housing.

In the backdrop of the Covid19 pandemic, the UAE introduced many expat-friendly schemes to attract and retain a high-skilled workforce, essential to support its vision for the 4^th Industrial Revolution future. Even if we consider the “expat exodus” from the country last year, there are silver linings: in early Nov, the Indian Ambassador revealed  that more than 200k Indians were returning to the country (this compares to the 600k persons that travelled after May); PMI’s employment sub-category is finally in the expansion territory after months of sub-50 readings. Rather than focusing on inward facing nationalization policies, other GCC nations could take a leaf out of the UAE’s example to encourage job creation (including for their citizens). This would be an enlarge the cake, win-win policy as opposed to taxation of remittances.
 
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The article titled “Will the UAE’s accelerated vaccine campaign help fuel economic growth?” appeared in the print edition of The National on 16th February 2021 and is posted below.
 
 

Will the UAE’s accelerated vaccine campaign help fuel economic growth?

Nasser Saidi & Aathira Prasad

The drive could help improve herd immunity and gradually return business activity to pre-pandemic levels
 
Countries around the world, including in the Gulf region, have registered a sharp increase in Covid-19 cases amid a rise in new virus strains.
As the number cases grows, the UAE has reintroduced more stringent restrictions and penalties for non-compliance to ensure the safety of residents and stem the pandemic’s spread.
In tandem with safety measures, the country has also hastened its vaccination drive since December and is currently a global leader, having administered 51.11 vaccine doses for every 100 people as of Sunday, making it second only to Israel.
With four vaccines being expended currently – Sinopharm, Pfizer-BioNTech, AstraZeneca and Sputnik V – the government is on track to vaccinate more than half the population by the end of the first quarter of this year.

Is this sufficient to support economic recovery?

Given the paucity of monthly indicators or data from official sources, we use purchasing managers’ index numbers released by IHS Markit to gauge the level of business activity in the UAE and Dubai.
Both PMIs have stayed quite close to the neutral 50-mark from December to January after having spent two consecutive months in contractionary territory. Job prospects seem to be improving in Dubai and across the country.
However, Dubai’s tourism sector, which recorded a sharp increase in activity in December, returned to sub-50 levels as tourists returned after the New Year holidays and travel restrictions were tightened.
With the vaccination drive, it is evident that as the nation inches closer to achieving herd immunity, domestic activity and business and consumer levels will gradually build up to pre-pandemic levels.
Investor and business-friendly reforms to convince skilled professionals to take up residence in the country will help spur economic activity. While the success of these structural reforms will not be immediate, their steady and effective application is expected to support economic growth in the medium and long term.

How can the UAE step up its recovery?

It is in the best interests of the UAE and Dubai, which is hosting the Expo later this year, for the wider region and the rest of the world to achieve high vaccination levels.
The longer countries remain unvaccinated, the greater the risk of newer strains emerging that could potentially result in another cycle of infections and subsequent movement restrictions.
There are two potential ways to support this.
First, it is crucial to increase the production of vaccines. A recent paper by the University of Chicago said “increasing the total supply of vaccine capacity available in January 2021 from two to three billion courses per year generated $1.75 trillion in social value, while additional firm revenue was closer to $30bn”, far outweighing the investment required to do so.
Vaccination is a public social good that has several private benefits while the coronavirus remains a global threat. So, the UAE’s plans to manufacture the Sinopharm Covid-19 vaccine later this year would be a win-win situation that would cater to both domestic and global demand – especially if the vaccine is to be administered on an annual basis – and boost growth.
Secondly, the manufactured vaccines need to be distributed faster to reach those in need. To this end, the UAE is well-positioned as a global logistics and transport hub – both for delivering vaccines to smaller nations in the region and using its vast cargo network to transport Covid-19 shots around the world.
Abu Dhabi’s Hope Consortium was set up for vaccine storage and distribution while Dubai’s Vaccine Logistics Alliance will support the World Health Organisation’s effort to deliver two billion doses of vaccines this year.
This could be supported by vaccine aid – either in its contribution to global alliances such as Covax, which plans to deliver 2.3 billion doses this year, or through the free delivery of vaccines to smaller and poor nations, for example, India’s campaign to distribute free vaccines in Nepal, Bhutan and Bangladesh.
A global recovery is essential to the UAE’s overall growth prospects. As a country that relies on trade and tourism, which accounted for about 15 per cent of national gross domestic product and about 30 per cent of Dubai’s GDP in 2019, the impact of Covid-19 has been significant.
Despite Opec+ production cuts and a subdued demand for crude, signs of a recovery in oil demand (declining oil inventories in China and India) and higher oil prices (about $60 now) will be beneficial to trade and growth.
The UAE’s oil and related product exports are about 40 per cent of total exports and the main export destinations include India, China and Japan, which together account for more than 25 per cent of overall exports and are recovering faster than European markets and the US – to the UAE’s benefit.
Lastly, no outlook is complete without risks. Long-term diversification away from oil is an overarching imperative, as is decarbonisation and debt sustainability, especially in the context of another potential taper tantrum or a faster-than-expected increase in interest rates that leads to tighter financing conditions.
The UAE should continue to press forward with its clean energy initiatives and energy efficiency policies. As the success of the Mars Hope probe has demonstrated, the country has the will, leadership and access to technology and resources to turn the challenge posed by the pandemic into a lever that can help its economy and activities become green, clean, innovative and resilient to climate change.
 

Download a PDF copy of this week’s insight piece here.
 
The UAE has seen a surge in Covid19 cases recently, touching a high of 3,977 new cases on Feb 3rd from just under 1,000 new cases on 27th of Dec and settling around a 7-day average of 331.55 new confirmed cases per million persons (latest available). As the cases ticked up, the UAE has re-introduced more stringent restrictions and an active crackdown on non-compliance. Mobility indicators indicate a strong negative relation with the Stringency Index: the tighter the government-imposed restrictions, the stronger is the observed reduction in mobility (Chart 1).
The Vaccination Drive
On the other hand, the UAE is also ramping up its vaccination drive since mid-Dec and is currently a global leader (second to Israel) having administered 45.77 vaccine doses per 100 people (as of 9^th Feb, Chart 2). With 4 vaccines being expended currently – Sinopharm, Pfizer-BioNTech, AstraZeneca and Sputnik V – the government looks on track to vaccinate more than 50% of the population by end of Q1 of this year.
Is this sufficient to support economic recovery?
Given the paucity of monthly indicators/ data from official sources, we use the PMI numbers released by IHS Markit to gauge the level of business activity in the country and in the emirate of Dubai (Chart 3). Both PMIs have stayed quite close to the 50-mark (neutral) in Dec-Jan after two consecutive months of being in the contractionary territory. Job prospects seem to be improving in both UAE and Dubai, with increases in Jan (after nearly a year). Dubai’s tourism sector, after an uptick in Dec, has however returned to sub-50 levels – not unsurprising considering the outflow of foreign tourists after the New Year holidays (Dubai-London Heathrow travel corridor was the busiest international air route in the world in Jan, with more than 190k seats scheduled, according to OAG) and potential decline in domestic and international tourists as border/ quarantine restrictions were reinstated.

With the vaccination drive, it is evident that as the nation inches closer to herd immunity levels, domestic activity as well as business and consumer levels will gradually build up to pre-pandemic levels. However, domestic activity will not be sufficient to sustain long-term economic growth. It is pertinent to note that the UAE has in the past months passed a spate of investor and business friendly structural reforms including to attract skilled professionals to take up residence in the country. While the success of these reforms will not be seen immediately, steady and effective implementation is likely to support economic growth in the medium and longer-term.
How can the UAE step up its recovery? The UAE as a vaccination hub

It is in the best interests of the country, that is hosting the Expo later this year, to see high levels of vaccinated populations within the wider region (and globally). The longer countries remain unvaccinated, the greater the risk of the emergence of newer variants that could potentially result in another cycle of infections and lockdowns/ closures.
Two potential ways to support this:

1. Increase the production of vaccines: a recent paper estimates that “increasing the total supply of vaccine capacity available in Jan 2021 from 2bn to 3bn courses per year generated USD 1.75trn in social value, while additional firm revenue was closer to USD 30bn”, far outweighing the investments required to do so. Vaccination is a public social good with multiple private benefits, just as Covid is a global public bad. So, the UAE’s plans to manufacture Sinopharm Covid19 vaccine later this year would act as a win-win: it would cater to both domestic and global demand (especially if the vaccine is to be administered on an annual basis) and boost the economy.
2. The manufactured vaccines need to be distributed faster to reach those in need. In this backdrop, the UAE can put its position as a global logistics and transport hub to good use: vaccine delivery to smaller nations in the region as well as using its vast cargo network to transport vaccines across the globe. Dubai, with its Vaccine Logistics Alliance, will support WHO’s effort to deliver 2bn doses of vaccines this year; this is in addition to Abu Dhabi’s Hope Consortium which was set up for vaccine storage and distribution. This could be supported by vaccine aid – either in its contribution to global alliances like Covax (which plans to deliver 2.3bn doses this year) or via the free delivery of vaccines to smaller low-income nations (e.g. India’s free vaccines to Nepal, Bhutan and Bangladesh).

A global recovery is essential to the UAE’s overall growth prospects: as a country that relies on trade and tourism (together accounting for close to 15% of UAE’s GDP in 2019 and closer to 30% of Dubai’s GDP), the impact of Covid19 has been drastic (evident from UAE and Dubai GDP estimates). The oil sector, which constitutes 30% of UAE’s GDP, has been bogged down by the OPEC+ production cuts, alongside the subdued demand for oil. Even as the country promotes clean energy and energy efficient policies, signs of a recovery in oil demand (declining oil inventories thanks to turnaround in consumption in China and India) and higher oil prices (around USD 60 now) will be beneficial to trade and growth: UAE’s oil and related product exports are close to 40% of total exports and the main export destinations include India, China and Japan (which together garner more than 25% share of overall exports). A recovery in tourism is likely to take longer in comparison: virus containment, travel corridors, “vaccine passports” and “contactless” airport experiences seem to be some of the ways forward for future travel.
Lastly, no outlook is complete without risks: long-term diversification away from oil is a necessity, as is decarbonization efforts, and debt sustainability policies (especially in the context of another potential taper tantrum / faster-than-expected increase in interest rates, leading to tighter financing conditions).
 
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Dr. Nasser Saidi spoke to Al Arabiya’s Nadine Hani on 9th Feb 2021 about the $1.9trn stimulus plans in the US and whether this would lead to inflationary pressures. Will this support a stock market bubble, leading to an eventual crash?
Watch the full interview (in Arabic) here.
 

Dr. Nasser Saidi joined Manus Cranny on the 7th of February, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the state of the US economy, the $1.9trn economic rescue package (including composition of spending), inflationary pressures (?), taper tantrums & financial fragility, as well as Italy & its prospects under Mario Draghi.
Watch the interview below – Dr. Nasser Saidi joins from 06:52 till 18:30. The original link to the full episode: https://www.bloomberg.com/news/videos/2021-02-07/-bloomberg-daybreak-middle-east-full-show-02-07-2021-video

Download a PDF copy of this week’s insight piece here.
 
1. Covid19 cases rise in the Middle East & so do Restrictions

• Covid19 cases in MENA crossed 5 million; the GCC is home to 24% of confirmed cases
• The uptick in cases has seen many countries re-introduce border controls (e.g. Oman, Lebanon), flight restrictions (e.g. Saudi Arabia) as well as capacity/ recreational activity restrictions (e.g. UAE/ Dubai)

Source: John Hopkins University (https://coronavirus.jhu.edu/map.html), Oxford COVID-19 Government Response Tracker from Blavatnik School of Government – Our World in Data (https://ourworldindata.org/grapher/covid-stringency-index); Charts created by Nasser Saidi & Associates.

2. Vaccination drives are picking up

• Focus has shifted to vaccination drives, with almost all GCC nations receiving a combination of supplies including Pfizer, Moderna, AstraZeneca, Sinopharm and Sputnik V vaccines
• UAE has administered a total 34.8 vaccination doses per 100 people, behind only Israel (58.8) globally
• In terms of the share of fully vaccinated population (i.e. both doses), Israel tops at 21.43% followed by UAE at 2.53% and US (1.81%)
• UAE’s hub status supports distribution: Dubai’s Vaccines Logistics Alliance & Abu Dhabi’s Hope Consortium to deliver vaccine doses across the globe
• A potential manufacturing hub? UAE is building up its capacity to manufacture the Covid19 vaccine in the future

3. Businesses ride the wave of vaccine optimism in Saudi Arabia & UAE

• Jan 2021 PMI data showed Saudi ticking up to a 15-month high while in the UAE, though the headline number remain unchanged, jobs moved into positive territory for the first time in over a year
• Lebanon’s numbers remain dismal with the complete lockdown adding to the existing socio, economic and political woes
  

Source: Refinitiv Datastream, Nasser Saidi & Associates.

4. Indicators of economic activity in Saudi Arabia

• Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – have shown a divergence during the pandemic year
• For the full year 2020, PoS transactions rose by 24% yoy while ATM cash withdrawals were negative, declining by 15% – pointing to the rise in digital/ contactless/ e-payments in a Covid19 backdrop
• Overall loans picked up in the country, with loans to the private sector for the full year rising at 12.8% versus a 17.8% uptick in loans to the public sector

Source: Saudi Central Bank (SAMA), Refinitiv Eikon, Nasser Saidi & Associates.

5. Indicators of economic activity in the UAE

• More than 2/3-rds of UAE banks’ loans went to the private sector (69.4% as of Nov 2020 vs. 76% in end-2018 & 72% in end-2019), while public sector & government together account for ~30% of all loans in Nov 2020 (vs. 25% a year ago)
• However, the overall pace of lending to GREs (+23.2% yoy during Apr-Nov 2020) and the government (+18.5%) outpaced the drop in lending to the private sector (-1.6%)
• Bank credit by business activity showed an interesting pattern: as of end-Sep 2020, loans towards agriculture surged by 18.6% qoq, following a 18% uptick in end-Jun, underscoring the recent focus on food security and evidence of investments into vertical farming and agritech companies (its share of total loans is just 0.13%). Loans to the transport & logistics have shown a strong upsurge, rising by 52.1% yoy as of end-Sep.
• Personal loans for consumption (accounting for 20.6% of total loans) rose by 1.3% yoy at end-Sep (Jun: 0.7%).

Source: UAE Central Bank, Refinitiv Eikon, Nasser Saidi & Associates.

 
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1. Global Recovery in 2021, albeit divergent & uncertain
The IMF, in its latest World Economic Outlook update, forecasts global recovery at 5.5% this year and 4.2% in 2022, from a contraction of 3.5% in 2020. There is a divergence in recovery: advanced nations, where growth plunged by 4.9% last year, will recover at a slower 4.3% while emerging markets recover at a faster 6.3% in 2021 (2020: -2.4%). Much of the emerging market recovery is thanks to the effective containment of Covid19 in China and many of the South-east Asian nations. The growth estimates are based on continuing policy support (and its effectiveness) and roll-out of vaccines (though its pace and logistics issues are identified as a concern) and “supportive financial conditions” (thanks to major central banks’ maintaining current policy rates through to 2022).
While over 150 economies are expected to have their per capita incomes below the 2019 levels in 2021, the projected cumulative output loss over 2020–2025 is forecast to be USD 22trn (relative to the pre-pandemic projections).
Fig 1. Global economic growth set to recover by 5.5% this year

Source: IMF World Economic Outlook, Jan 2021
The slowest pace of recovery among the regions is in the Middle East (+3% growth this year), a result of the shocks from both Covid19 and lower oil prices. The average price of oil last year was USD 41.29 (simple average of Brent, Dubai Fateh and WTI) and this is estimated to rebound by 21.2% yoy to USD 50.03 this year. As Covid19 cases surge globally, leading to newer restrictions/ lockdowns, the demand for oil is likely to stay subdued: consequently, OPEC+ monthly meetings are unlikely to result in production increases anytime soon. Even if vaccines are distributed quicker-than-expected, resulting in an increase in economic activity earlier than anticipated, there are multiple other factors that are likely to keep oil prices within the USD 50-55 mark (Figure 2).

In addition to lower demand due to Covid19 restrictions, growing awareness of climate change risks (& related policy changes) and energy efficiency policies will also affect the demand for oil. On the supply side, technological innovation and rapidly falling costs for solar and wind power has made renewables more competitive. Figure 3 shows the plunge in price of electricity from renewable sources: onshore wind fell by 70% to USD 41 last year from USD 135 in 2009; the dive in solar PV was more eye-popping – it fell by a massive 89% to USD 40 last year from USD 359 in 2009.
2. Services trade continues to drag

The WTO, in its latest report on services trade, highlights that the recovery has been slow: the decline in global services trade eased to a 24% yoy decline in Q3, from the 30% drop posted in Q2. This compares to the goods trade recovery which was down by just 5% yoy in Q3. Sector-wise, unsurprisingly, travel is the most affected, down by 68% yoy while among “other services”, computer, insurance and financial services increased in Q3 (+9%, 3% and 2% respectively). Global PMI indicators also suggest that economic recovery is driven by manufacturing vis-à-vis services: in Dec, output across manufacturing sector outperformed the services sector for the 6^th straight month. Within the services index, respondents expect growth in future activity though optimism levels waned towards the end of last year.
3. Labour market recovery in 2021?
A key sub-indicator within PMI is employment – one of the main components dragging down the headline index. According to the ILO, about 8.8% of global working hours were lost for the whole of last year (relative to Q4 2019), roughly equivalent to 255mn full-time jobs. To put this in perspective, this was four times more than what was lost in the 2009 financial crisis period. In turn, labour income witnessed a decline of 8.3% – equivalent to USD 3.7trn or 4.4% of GDP!
In the Arab states, total estimated decline in working hours was 9% versus the global loss of 8.8% (Figure 5 below). However, these are ILO’s own estimates, as no labour force surveys were available for any country in the region during this time. According to these estimates, Iraq and Saudi Arabia registered losses of 8.3% and 10.8% respectively.
Fig 5. Quarterly & annual estimates of working hour losses, world vs. Arab states

Source: ILO Monitor: COVID-19 and the world of work, seventh edition, Jan 2021
Recovery is expected in 2021 as mobility restrictions are lifted and vaccine roll-out leads to a slow return of business/economic activity. With young persons and women as well as the informal sector and low-skilled workers more affected than the rest during the Covid19 period, it is imperative to target the return of these groups into the labour market. Without this, the outlook will be more inequality and instability (remember that youth unemployment was one of the factors leading up to the Arab Spring 10 years ago) in the most affected nations. As it stands, the IMF estimates that close to 90mn persons are likely to fall below the extreme poverty threshold during 2020–21.
4. Employment in Saudi Arabia
Separate data releases from Saudi Arabia give us an insight into employment trends in the country, which can be explained by a combination of Covid19, travel restrictions and Saudization policies:

• Unemployment in Saudi Arabia dropped to 14.9% in Q3 from 15.4% the previous quarter, though higher than Q1’s 11.8%. The gap between male and female unemployment remained significant, with the former at 7.9% and latter at 30.2%.
• The most recent labour force survey shows that the number of expats working in the country fell by 257,170 (qoq) to 10.2mn in Q3 while citizens grew by 81.9k to 3.25mn. Expat males account for two-thirds of the workforce versus Saudi males and females at 15.6% and 8.6% respectively in Q3.
• There was a 58% yoy decline in work visas issued to expats to 611,185 in Jan-Sep 2020.

While on the one hand, the country has an aim to support female employment (an objective within the Vision 2030 document is to raise women’s participation to 30% by 2030), there seems to be a major disconnect: female employment in the private sector is less than 10% of total, and the additional hurdles – like costs of employing women (separate floors/ work areas from the male counterparts), social customs,  technical skills (focus on degrees in education, humanities) – may be putting off prospective employers.
Independently, the Public Investment Fund (PIF) disclosed that it had generated over 331k jobs in the past 4 years either directly or indirectly through its investment policies. The PIF’s recent commitment to not only invest USD 40bn every year for the next five years but also create close to 1.8mn jobs by end-2025 will support the economy going forward.
According to UNCTAD’s latest “Investment trends Monitor”, FDI into Saudi Arabia increased by 4% yoy to an estimated USD 4.7bn last year – this is in spite of the 42% drop in global FDI flows (with further weakness expected in 2021) and the 24% decline in flows to West Asia. With various ongoing projects related to Vision 2030 and megaprojects in NEOM, as well as the revamp of over 200 FDI regulations, the Kingdom’s ability to woo investors is explicable: Egypt, India and the UK were the most active investors in the country. Care must be taken to attract FDI into more job-creating sectors than the oil & gas sector (which is more capital intensive). Given the country’s commitment to support clean/renewable energy, it is pertinent to focus on the creation of green jobs, thereby leading to sustainable economic recovery. 
 
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1. Global Uncertainty Drops, but Economic Policy Uncertainty Remains High

• World continues in the throes of the Covid19 pandemic, even as vaccines offer a light at the end of the tunnel
• The rollout has been slow in many nations; approval of other vaccines will help alleviate production/ distribution hurdles
• Other policy concerns continue: fallouts from Covid19 across the globe, implementation of Brexit, US new administration’s policies (China, Iran,…)
• Political turmoil/ uncertainty: Italy, Israel, Malaysia…

2. Global Risks Shift Gear in 2021

• The World Economic Forum’s Global Risks Report 2021 perceives higher risks from environmental categories with extreme weather, climate action failure & human environmental damage taking the top 3 spots
• With spillover effects from the Covid19 outbreak likely to continue this year and possibly next, it is not surprising that infectious diseases top global risks by impact (& 4th on the “likelihood” list)
• Growing evidence that the Covid19 outbreak has widened existing disparities (poverty, gender, access to health facilities…); digital divide and adoption of technology further adds another layer to the inequalities (ability to work remotely, access online learning, e-commerce…)
  

 
 
 
 
 
3. Covid19 outbreak continues unabated in the Middle East

• The number of cases in the Middle East continue to rise with Iran the major hotspot accounting for 28% of cases in the region; the GCC nations combined are home to 24% of total cases
• Among the GCC nations, Saudi Arabia accounts for the largest share of cases, while UAE’s share of daily confirmed cases per mn persons is highest (the size of the bubble indicates the 7-day average of daily increase in cases). A concerted vaccination effort ongoing in most of the GCC nations offer a glimmer of optimism

 
4. Greater the restrictions, larger the drop in mobility; recovery in Saudi

• With cases rising at a faster rate in the recent weeks, some economies in the Middle East have enforced restrictions recently: Lebanon’s lockdown has resulted in an uptick in the Stringency Index while UAE remains one of the most open (least stringent) in the region
• Mobility (retail and recreation) has dropped in a highly restricted Lebanon (-40% compared to the 5-week period Jan 3- Feb 6, 2020). Egypt and UAE are still around 20% below the baseline, while in Saudi, mobility is picking up

 
5. Vaccination Drives Raise Hope for Recovery in 2021

• Israel, UAE and Bahrain top the list of cumulative vaccine doses administered per 100 persons (chart)
• Almost 1 in 5 persons in the UAE have received at least one dose of the vaccine, and 2.5% of the population are fully vaccinated (i.e. both doses received)
• The vaccination drives in both Israel and UAE have picked up pace recently, with the 7-day average of daily vaccine doses administered per 100 persons was at 1.46 and 1.11 respectively (as of Jan 20, 2021)

Benefits from the vaccination drive for UAE

• Race towards herd immunity
• Lower uncertainty, greater consumer & business confidence
• Ability to reopen the economy fully, resume economic activity at pre-Covid19 pace
• Travel corridors open up, supporting tourism & hospitality sectors
• Support for domestic sectors including trade & logistics as global demand picks up
• Stronger links with Asia, given the region’s faster paced recovery vis-à-vis US/ Europe
• Support regional economies with vaccination doses

 
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Dr. Nasser Saidi joined Manus Cranny on the 17th of January, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing Biden’s $1.9trn economic rescue package in the US, strength of the euro & the ECB narrative.
Watch the interview below – Dr. Nasser Saidi joins from 07:30 till 17:15. The original link to the full episode: https://www.bloomberg.com/news/videos/2021-01-17/-bloomberg-daybreak-middle-east-full-show-01-17-2021-video

Download a PDF copy of this week’s insight piece here.
 
1. Trade recovers in Q3; services trade lags
WTO’s latest Q3 data indicate a distinct rebound in trade: the volume of merchandise trade globally was up 11.6% qoq from an upwardly revised 12.7% drop in Q2. Exports dropped in yoy terms among all regional groups with the exception of Asia, where the value and volume inched up by 2% and 0.4% respectively. With Covid19 cases surging in Q4 across most regions, partial lockdowns and restrictions were re-imposed, which is likely to lead to a drop in overall trade in the final quarter.

 

Global new export orders growth – a leading indicator for trade activity – slowed in December, according to the latest global manufacturing PMI, and was linked to intensifying supply chain delays. The most cited response for delays amid rising demand was the lack of shipping capacity/shortage of containers. The recent surge in freight prices underscores the dilemma: sea freight on the China-Brazil route reached an unprecedented USD 10k per TEU from USD 2k per TEU a year ago. Other routes from Asia have also posted above-average values: trip costs to Europe and the US reached more than USD 4k per TEU.
This week, the WTO launched a new dataset along with the OECD tracking bilateral services trade of over 200 economies. The chart shows that the share of intra-regional trade in services is low in Africa (7%), South & Central America (12%) and the Middle East (13%). Unfortunately, since no bilateral services transactions are reported by African or Middle Eastern economies, it is difficult to gauge the underlying factors leading to this situation. The decline in services trade was significant in 2020 given restrictions on international travel and related drop in tourism revenues.
2. Tourism woes continue globally; Middle East significantly affected
The UNWTO reported a 72% drop in international tourist arrivals during the Jan-Oct period, with the Middle East region continuing to lag its global counterparts in tourism arrivals (-73% year-to-date). International tourism as a share of total tourism is significantly high in Bahrain (97%) and UAE (83%), making these nations more vulnerable than say, Saudi Arabia, with its share at 26%. With air travel restrictions still in place in many nations, and hotels either closed or open at lower capacity, the road to recovery will be long.

 
 
 
Occupancy rates in the region have improved towards the end of 2020, with residents opting for staycations than international travel given restrictions. Egypt reopened international tourist flights to three governorates (including Red Sea) last Jul: overall, the country welcomed 3.5mn tourists last year, resulting in overall revenues of USD 4bn, down from 11.6mn tourists and USD 13bn in revenues in 2019. In the UAE, Dubai opened for tourists in July: almost 17.88 million passengers passed through the Dubai Airports last year, while occupancy rates in the emirate’s hotels touched 71% in Dec, the highest since Feb. The UAE-UK travel corridor (announced 12^th of Nov) resulted in an acceleration in bookings, with the Dubai-London Heathrow travel corridor revealed as the busiest international air route globally in the first week of January. Interestingly, Cairo-Jeddah was the second most popular route.
With the rollout of vaccines, and nations heading towards achieving herd immunity, the latter half of this year might see a pickup in air travel and tourism: this should also support Dubai’s Expo event scheduled to start in Oct 2021 and Qatar’s 2022 FIFA World Cup.
3. The Global Vaccination Drive picks up

Israel, the UAE and Bahrain top the list of the share of total population that have received at least one dose of the Covid19 vaccine – at 22.4%, 11.57% and 5.96% respectively (updated at 1:30pm UAE time on 14th Jan 2021). In terms of the share of fully vaccinated population, UAE tops at 2.53% followed by Israel at 1.21% and the UK at 0.63%.

UAE’s ability to vaccinate quickly its small and highly concentrated, urbanised populations – with 96 vaccination locations across Abu Dhabi alone and others in the rest of the emirates, more than 100k persons were vaccinated per day in the last two days – is also a testament to its established and reliable healthcare systems.
Given the data, UAE’s aim to vaccinate 50% of the population by end-Q1 does not seem far-fetched. The faster the vaccination drive, the greater relaxation of quarantine rules, higher the number of travel corridors (“immunity passports”) and UAE could become one of the top tourist destinations globally. One step further, and if the nation manages to achieve herd immunity, could the nation also aspire to become a “vaccine tourism” hub? (setting aside the ethical aspect). Furthermore, with UAE also planning to manufacture the Sinopharm vaccine, the potential for Abu Dhabi/ Dubai as vaccine manufacturing and distributing hubs is rising (with the international connectivity of its Etihad and Emirates airlines).
Bottomline: With the global vaccination drive, depending on how soon countries are able to achieve herd immunity, we can expect a resumption of activity in travel and tourism. Additionally, efficacy of the vaccines will not only raise consumer confidence (and demand), but also result in lowering business uncertainty, resume manufacturing and services sector activity and ease supply constraints, thereby boosting global trade.
 
 
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1. Heatmap of Manufacturing/ non-oil private sector PMIs

PMIs across the globe were released this week. Overall, recovery seems to be the keyword with improvements in Dec – in spite of the recent Covid19 surge, the Covid variant and ongoing lockdowns/ restrictions – with new orders and export orders supporting sentiment, with some stability in job creation. However, supply chain issues continue to be a sticking point: the JP Morgan global manufacturing PMI – which remains at a 33-month high of 53.8 in Dec – identifies “marked delays and disruption to raw material deliveries, production schedules and distribution timetables”.
In the Middle East, while UAE and Saudi Arabia PMIs improved (the former recovering from 2 straight months of sub-50 readings), Egypt slipped to below-50 after 3 months in expansionary territory. While Egypt’s sentiment dipped on the recent surge in Covid19 cases, the 12-month outlook improved on optimism around the vaccine rollout. However, the UAE’s announcement of the rollout of Sinopharm vaccine in early-Dec seems to have had little impact on the year-ahead outlook, with business activity expected to remain flat over 2021 (survey responses were collected Dec 4-17) and job losses continuing to fall at an accelerated rate.
2. Covid19 & impact on Dubai & UAE GDP
The UAE has seen a negative impact from Covid19: the central bank estimates growth this year to contract by 6% yoy, with both oil and non-oil sector expected to contribute to the dip (this is less than the IMF’s estimate of a 6.6% drop in 2020). Oil production fell in Q2 and Q3 by 4.1% and 17.7% yoy respectively, in line with the OPEC+ agreement, and spillover effects on the non-oil economy saw the latter’s growth contract by 1.9% yoy in Q1 (vs oil sector’s growth of 3.3%). The latest GDP numbers from Dubai underscore the emirate’s dependence on trade and tourism to support the non-oil economy: overall GDP dropped by 10.8% yoy in H1 2020; the three sectors (highlighted in red border below) trade, transportation and accommodation (tourism-related) which together accounted for nearly 40% of GDP declined by 15%, 28% and 35% respectively. Dubai forecasts growth to decline by 6.2% this year, before rising to 4% in 2021.

News of a 5^th stimulus package worth AED 315mn (announced on 6^th Jan) for Dubai – an extension of some incentives till Jun 202, refunds on hotel sales and tourism dirham fees, one-time market fees exemption for establishments that did not benefit from reductions in previous packages and decision to renew licenses without mandatory lease renewal among others – will support growth this year, as well as the uptick from Expo 2021 (based on widespread vaccinations across the globe and potential resumption of air travel by H2 this year). With plans to inoculate 70% of the UAE population by 2021, we remain optimistic about UAE/ Dubai prospects subject to the effective implementation of the recent spate of reforms (including the 100% foreign ownership of businesses, retirement & remote working visas etc.) as well as embracing new and old synergies – Israel and Qatar respectively. Medium-term prospects can be further enhanced by accelerating decarbonization and digitisation – read a related op-ed published in Dec.
3. UAE credit and SMEs
The UAE central bank has extended support to those persons and businesses affected by Covid19 by launching the Targeted Economic Support Scheme, which is now extended till Jun 2021. Overall credit disbursed till Sep 2020 was up 2.9% yoy and up 1.2% ytd: but during the Apr-Sep 2020, the pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced that to the private sector (-1.0%).

 
It has been a difficult period for MSMEs (Micro, Small and Medium Enterprises): the number of MSMEs declined by 8.5% qoq in Sep 2020, following an uptick of 3.9% qoq in Jun 2020, signaling deteriorating business conditions that may have forced such firms to close. This also suggests a potential increase in NPLs once the current banks’ support (e.g. deferring loan periods) come to a close. Overall domestic lending also fell by 0.9% qoq as of Sep 2020. The largest share of loans within the MSME sector continues to be to the medium-sized firms (57.3%) and about 1/3-rd to the small enterprises. Considering the amount disbursed per firm, medium enterprises pocketed AED 1.8mn in Q3: this is 3.4 times the amount disbursed per small firm and 5.3 times the amount disbursed to microenterprises.
SMEs also need to think beyond the financial pain point to survive in the post-pandemic era. In addition to reducing/ streamlining operational costs[1], learning digital skills, boosting online profiles and hosting a robust payments and collections platform will also support SMEs to be more bankable in the future.
4. Back to “business as usual” for the GCC

The recent GCC Summit saw Qatar’s blockade (imposed in 2017) being lifted: this improves and will support political stability (a “united GCC” front) and is likely to restore UAE and Saudi businesses direct trade and investment links. Allowing bilateral tourist movements will support upcoming mega-events in the region like the Dubai Expo this year and Qatar’s 2022 World Cup. Trade will be restored among the nations: imports from the UAE had dropped to a negligible 0.1% last year, from close to 10% in the year before the blockade. Oman, meanwhile, had gained – with businesses opting to re-route trade with Qatar through Oman’s ports.
Greater GCC regional stability, implies lower perceived sovereign risk, including credit risk which –other things equal- will lead to an improvement in sovereign credit ratings, lower spreads and CDS rates and encourage foreign portfolio inflows as well as FDI.
 
[1] Even Mashreq Bank, Dubai’s 3^rd largest lender, is planning to reduce operational costs by moving nearly half its jobs to cheaper locations in the emerging markets (to be completed by Oct 2021), according to a Bloomberg report.  
 
 
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The op-ed by Dr. Nasser Saidi, titled “Accelerating decarbonisation and digitisation can build upon UAE’s game-changing reforms“, appeared in The National on 27th Dec 2020 and is reposted below.
 

 
Adjusting to Covid-19 has defined this year – from partial or full lockdowns to remote working and stalling global trade, investment and tourism, with cleaner air the rare bright spot.
Hopes of a V-shaped recovery diminished with the emergence of new Covid strain and subsequent lockdowns. Yet, despite the “Great Lockdown” resulting in a deep recession, markets are exuberant amid expectations that the production and distribution of several vaccines will create a path to normality in 2021.
Unlike the global financial crisis from 2008 to 2009, which began as a housing bubble and a demand shock, the current health crisis began as a supply shock that disrupted global supply chains and caused a spillover to the demand side, where it hit trade, tourism and consumption.
Given the widespread impact of the pandemic and despite concerted monetary and fiscal stimulus equal to 12 per cent of global gross domestic product, not only will the road to recovery be longer but the cumulative output loss will be much larger than during the 2008 financial crisis, with long-term scarring of labour markets and economies expected.
The UAE’s combined monetary, fiscal and health stimulus package – equal to 18 per cent of its GDP – cushioned the economy after a demand-induced oil price shock and the effects of a global lockdown.
After several weeks of movement restrictions and stringent health measures, the UAE’s public health system proved effective and resilient, allowing the economy to reopen earlier than regional peers.
While maintaining social distancing and applying Covid-19 protocols to keep the community safe, the UAE reopened offices, businesses, allowed tourists to enter and successfully held events and conferences – both online and on site. This bodes well for the delayed Expo 2020 Dubai and the resumption of tourism.
With the reverberations of Covid-19, the UAE’s policy reforms were spot on – from the game-changing 100 per cent foreign ownership of businesses to the remote working initiative to the retirement and 10-year residency visas for skilled professionals – amid the country’s intentions to become a knowledge-based, innovative economy.
Liberalisation and market access reforms are set to attract foreign investment, boost capital flows to the property market, enhance workforce skills and support innovation and productivity growth.
With energy market volatility and lingering coronavirus-induced uncertainty, what activities can drive an economic recovery next year and support medium-term growth prospects?
For GCC oil producers, de-risking fossil fuel assets by following a strategy of part-privatisions and public-private partnerships in energy reserves, upstream and downstream operations and related infrastructure such as pipelines is important. This has started with Adnoc and Aramco.
With the oil price required to balance budgets higher than current prices, deficit financing instruments should be developed by governments. We can expect new government bonds to be issued next year that will encourage more corporate bond issuances and private debt placements.
The UAE is accelerating its decarbonisation efforts, focusing on energy efficiency, transitioning to renewable energy and building on its leadership in renewable energy projects and investment in climate risk mitigation and adaptation.
Greater investment in agriculture technology for food security, which includes sustainable vertical farming and desert agriculture, should take place in tandem with the sustainability and energy efficiency drive.
Decarbonisation and the diversification of the energy mix will support the growth of the UAE’s capital markets through the issuance of green bonds and sukuk, as well as the financing of PPP and privatisation deals for renewable energy and clean technology.
Indeed, the UAE can become a regional, if not a global, centre for renewable energy finance.
Covid-19 has led to a strong impetus to digitise as working and learning from home became more popular. The UAE should build on its strong e-commerce and e-services base by massively investing in 5G to support the Internet of Things and building smart cities and infrastructure.
This is critical for the retail sector to move online from brick-and-mortar shops. Liberalising the telecoms sector and lowering the costs of broadband services will help the country become a fully digitised economy and a regional hub for digital services.
The UAE has world-class core infrastructure in transport and logistics, power and telecoms. These assets can serve infrastructure-poor countries in the region, East and Central Africa, India, Pakistan and Central Asia. Electricity from solar power can be exported through cross-country, integrated grids.
Finally, the UAE’s normalisation of relations with Israel heralds a new regional economic geography: new trade and investment opportunities, as well as the reduction of geopolitical tensions.
 

Download a PDF copy of this week’s insight piece here.
 
Chart 1: Uncertainty in the time of Covid19

Both Economic Policy Uncertainty and Pandemic Uncertainty indices touched record-highs during the Covid19 crisis. Even with vaccines being rolled out, a new strain of Covid19 in UK has led to stricter lockdown measures, border closures and travel bans.
Policy Uncertainty has been severely high this year, when compared to the global financial crisis or Brexit referendum or the US-China trade war phase. With fiscal and monetary responses continuing to support economies, care should be taken to ease the withdrawal of support in the future.
Countries need to be prepared for a phase of unemployment and wave of business closures when exiting the crisis.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chart 2: Trade bounced back in Q3, but will the current surge lead to another drop? Tourist Arrivals remain dismal
Trade growth recovered in Q3; but recent surge in cases, a new strain and related closures will likely result in lower demand & dip in trade in Q4.
Meanwhile, thanks to the recovery in new export orders, both shipping & cargo indicators are turning positive.
As international air travel as not picked up, air cargo has suffered, thereby directing demand towards shipping. However, as the holiday season got underway towards end-2020, demand ticked up, but container shortages are leading to higher shipping rates.
Tourism remains unlikely to recover to near pre-pandemic levels till vaccines reach a substantial proportion of global population. Prior to the recent surge in cases, domestic tourism (& therefore air travel) had picked up in Europe and Americas.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chart 3: Saudi Arabia’s GDP shows recovery in Q3; private sector growth declines by 4% ytd
Saudi Arabia’s GDP declined by 4.3% in Q3, rebounding from Q2’s 7% plunge, with declines across oil and non-oil sectors (-8.2% and -2.1% respectively). Within the non-oil sector, most sectors posted declines in Q3 ranging from manufacturing (-10.1%) to trade, restaurants & hotels (-5.2%) while finance, insurance & real estate edged up (+1.1%). Share of GDP by economic activity shows that oil sector continues to dominate (40% of overall GDP), followed by manufacturing (12%) and trade & hospitality (11%).
Signs of recovery are evident: PMI for KSA is the strongest in the region, with output and export orders all increasing. The latest reading for employment also increased for the first time since Jan. Credit to the private sector, cement sales and PoS transactions have all been rising. Allocation of funds towards the public health system and social spending in the 2021 budget underscores the government’s commitment to support the economy as vaccines are rolled out next year. The reduction in Covid19 health concerns and uncertainty will encourage increased consumption and investment by the private sector, helping to boost growth. Similarly, roll out of vaccines will help restore the flow of non-religious tourism and the Hajj which are important contributors to the economy.

 
 
 
 
 
 
 
 
 
 
 
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Dr. Nasser Saidi joined Yousef Gamal El-din on the 20th of December, 2020 as part of the Bloomberg Daybreak: Middle East edition, to discuss impact of Covid19 on economic activity, in addition to the US stimulus and unemployment, speculative frenzy in the markets, US-China tech “war” and Brexit negotiations.
Watch the interview below – Dr. Nasser Saidi joins from 05:30 till 15:00. The original link to the full episode:  https://www.bloomberg.com/news/videos/2020-12-20/-bloomberg-daybreak-middle-east-full-show-12-20-2020-video


Download a PDF copy of this week’s insight piece here.
 
Chart 1: PMIs in UAE/ Dubai remain below-50 for the 2nd consecutive month; mobility & traffic pick up though demand remains weak

Though UAE is one of the more “open” economies across the Arab world (in the Covid19 era), the PMI readings in both UAE and Dubai stayed below the 50-mark for two consecutive months. Vaccine exuberance seems to have been overshowed by the decline in business, as business expectations turn negative for first time ever in Dubai.
Demand weakness remains the main reason for the dip following an uptick after the initial lockdowns were lifted; with the recent surge in Covid19 cases in Europe & Asia, recovery has been slow in tourism and travel sector. There is some signs of optimism: flight bookings in the London-Dubai sector accelerated by 112% after the UAE-UK corridor was announced in early Nov; Israeli tourists are flocking to the city after the normalization of relations (& travel corridor) so much so that flydubai is now offering 4 Dubai-Tel Aviv flights daily.
UAE’s recent liberalisation measures (rights of establishment, visas & immigration) add to the medium-term optimism and potential acceleration in the rollout of vaccines by next year offers hope for visitor arrivals in time for Expo in Oct next year. However, the extent of business closures/ rising NPLs as an aftermath of the Covid19 crisis remains to be seen.
Mobility data from Google shows the pace of recovery at grocery and pharmacy stores was much faster than that for the retail and recreation outlets (restaurants, cafes, malls, theme parks etc); congestion levels are still about 33% below 2019 levels, though certain days in Nov-Dec showed positive readings (i.e. congestion this year at a higher rate than that day a year ago).

Chart 2: Saudi Arabia’s plans to diversify away from oil needs to be accelerated
Global demand for oil is recovering but remains weak given the impact of Covid19 and ongoing lockdown restrictions, therefore, plans to diversify away from oil dependence will need to be accelerated. In this regard, accelerated privatisation of state-owned assets is an essential structural reform: it is promising that the government estimates the sale of government companies and assets to double to about SAR 30bn in 2021. This will also encourage private sector investment and attract capital inflows.
Is the Saudi target to achieve a balanced budget by 2023 realistic? It depends on how fast both the global economy, Asia/China (critical for the growth of oil and gas demand) and the Saudi economy can recover from the effects of Covid19, in addition to how the OPEC decision to raise production pans out. On the domestic front, rationalising spending by phasing out subsidies and lowering public sector employment/ wages will likely support the move towards a balanced budget.

 
 
 
 
 
 
 
 
 
 
Chart 3: Saudi Arabia’s tax revenue supported by VAT, while capex spending is scaled down
The estimated rise in non-tax revenues is likely due to a combination of the recent rise in oil prices (+33% since Nov) and OPEC’s decision to resume oil production (plans to add 500k barrels a day to crude markets starting in Jan, with subsequent moves decided at monthly meetings). VAT hikes will contribute to the uptick in tax revenues, assuming there are no deferrals/ exemptions on taxes on goods & services next year. The Aramco dividend – of which 98% will accrue to the government – will also add to the government’s coffers (though the allocation between PIF/ reserves at SAMA or MoF is not clear).
Though the government’s capex spending has been significantly scaled down (-26.6%), it is a positive move, with the private sector being given more opportunities to execute infrastructure and developments projects (the massive NEOM project and others) and PPP, thereby supporting private sector growth and job creation (outside of the public sector).

 
 
 
 
 
 
 
 
 
 
 
 
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Dr. Nasser Saidi, a keynote speaker at the latest Bonds, Loans and Sukuk Middle East event, held virtually on 8-9 Dec 2020, presented a 30-min talk titled “A COVID-19-induced macroeconomic overview of the GCC”.
The presentation covered the macroeconomic impact of Covid19 pandemic on the global economy and the Middle East/ GCC region (economic growth, capital flows, trade, investment, labour movements, job losses). Also covered were the policy responses (monetary, fiscal, social and health policies) in addition to thoughts on the Biden Presidency and its regional consequences. The concluding remarks focused on GCC’s way forward post Covid19, looking at three pillars: geopolitics, the economy and new sectors of focus.
Download the presentation here.

 
 
 
 
 
 
Download a PDF copy of this week’s insight piece here.
 
Chart 1: PMIs in the Middle East/ GCC have had a slow restart compared to US/ Europe/ Asia post-lockdown, even during the latest wave
Manufacturing PMI readings have picked up in Nov across the globe, thanks to increases in export orders; global manufacturing PMI also showed employment rising for the first time in 12 months & business confidence at a 69-month high. Vaccine announcements in early-Nov probably added to the mostly positive outlook.
There is a distinct divergence in the Middle East, with UAE and Lebanon still below the 50-mark in Nov. Lebanon’s reading is a clear reflection of its domestic economic meltdown while UAE’s is pegged to subdued demand in spite of the nation being the least stringent (i.e. more “open”, including for tourists) in the region.
The announcement of the efficacy of the Sinopharm vaccine in UAE and planned deployment, in addition to the recent spate of announced reforms – rights of establishment, long-term residency, remote working & retirement visas –  should support business and consumer confidence in the months ahead.

Chart 2: Will vaccines signal a recovery and rescue the airline industry?
Vaccines have been in the news since early-Nov, with the latest announcement from the UAE on the Sinopharm vaccine. As the vaccines are rolled out next year, the hope is that nations recover to the pre-Covid19 phase.
International travel markets remain weak: Middle East airlines revenue passenger-kilometres (RPKs) were down by 86.7% and 88.2% for international connectivity and long-haul traffic in Oct. This should benefit the airline industry in 2 ways: (a) in the near-term, the industry will support distribution of vaccines across the globe: being well-connected to global hubs and given its fleet size, UAE’s Emirates and Etihad are well-placed to gain. Emirates SkyCargo transported more than 75mn kilograms of pharmaceuticals on its aircraft last year; (b) as more people get vaccinated, demand for and willingness to travel will increase probably by H2 next year along with ‘travel bubbles’.
However, the success of the vaccine distribution is also dependent on the last mile delivery hurdles and vaccine storage facilities.

Chart 3: Bank credit in the UAE
The UAE central bank extended its Targeted Economic Support Scheme (Tess) for another six months until June 30, 2021
During Apr-Sep 2020, the overall pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced lending to the private sector (-1.0%). The pace of SME lending has been slow as well, but up 3.5% year-to-date.
Breaking down lending by sector, there has been upticks in credit to both transport, storage and communication (+52.1% yoy as of end-Sep) as well as government (13.6% yoy); mining & quarrying and construction sectors saw declines of -14.4% and -1.9% respectively.

Chart 4: Indicators of economic activity in Saudi Arabia
Among the proxy indicators for consumer spending – ATM withdrawals and PoS transactions – the latter is picking up faster, supported by transactions in food and beverage (+28.9% during Jan-Oct 2020) and restaurants and cafes (+68.9%); in comparison, transactions at hotels are down by 33%. ATM transactions dropped by one-fourth to SAR 499.87bn in Jan-Oct.
Loans to the private sector in KSA has been growing at a double-digit pace since Mar this year, with the year-to-date growth at 12.4% yoy.
Cement sales have been on the uptick, supported by the number of ongoing mega-projects (like the Red Sea development) as well as residential demand: real estate loans by banks are up 38% till Q3 this year, outpacing growth in both 2018 & 2019 while PoS transactions in the construction and building materials is up 44.2% this year (a large 247.4% uptick in Jun, ahead of the VAT hike).

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Download a PDF copy of this week’s insight piece here.
 
UAE needs to attract FDI into viable, sustainable economic diversification sectors & projects
The liberalization of foreign ownership laws in the UAE (announced this week) breaks down major barriers to the rights of establishment and will be a game-changer for the country. This reform will help to reduce costs of doing business, lead to a recapitalization of existing jointly owned companies and encourage entrepreneurs to invest in new businesses and new ventures, supporting innovation and the introduction of new technologies while also promoting inflows of foreign direct investment. Foreign companies within UAE’s free zones would also be allowed to link up with the domestic economy, supporting local businesses and thereby boosting overall growth. The barriers between free zones and the domestic economy would become blurred, if not absent leading to greater competition and improved competitiveness.
The latest announcement follows a spate of reforms undertaken this year – including labour (long-term residency via a 10-year visa, Dubai’s virtual/remote working visa and retirement visa, Abu Dhabi’s freelancer permit/ license) and social (removing laws which criminalized alcohol consumption, cohabitation) – aimed to revive the economy attempts from the negative impact of low oil prices, Covid19 and the Global Lockdown. Importantly, these reforms will encourage the retention of savings in the UAE, reduce remittances and capital outflows, thereby structurally improving the balance of payments. Overall, the result will be an improvement in the Doing Business ranking of the UAE.
We focus on FDI in this Weekly Insight piece. FDI inflows are essential to the UAE’s diversification efforts, as it would not only create jobs, raise productivity and growth, but could also lead to transfer of technology/ technical know-how and promote competition in the market. According to the IMF, closing FDI gaps in the GCC could raise real non-oil GDP per capita growth by as much as 1 percentage point.
While FDI inflows into the Arab region have been slowing in the past decade, the UAE still remains one of the top FDI destinations in the region. Inflows dipped during the time of the financial crisis (to USD 1.1bn un 2009 from an all-time peak of USD 14.2bn in 2007), but rebounded to USD 13.8bn last year, before the Covid crisis. Reforms to improve the investment climate (including allowing 100% ownership at free zones and protecting minority investors), its ease in doing business, good infrastructure as well as macroeconomic and political stability are factors that have aided the increase in FDI.
In 2019, UAE was the second largest destination for FDI inflow into the Arab region (USD 13.6bn or 3.4% of GDP, accounting for 21% of total), behind Egypt (USD 13.7bn or 2.8% of GDP, 23% of total) while it dominated FDI by number of projects (445). Interestingly, UAE is also a major capital exporter, having invested a total USD 8.7bn into the Arab nations last year (topping the list and accounting for 14.4% of total FDI inflows into the region). In part, this reflects the UAE’s hosting of multi-national enterprises investing across the region.

 
In spite of the Covid19 outbreak negatively affecting FDI inflows[1], Saudi Arabia defied the trend by posting a 12% yoy increase in inflows to USD 2.6bn in H1 2020[2] – in part linked to its mega-projects related to achieving Vision 2030. In Q1 this year, the UAE, along with Saudi Arabia and Egypt accounted for a share of 65.4% of total investment cost of projects in the region, valued at USD 11.2bn. Outflows from the UAE still accounted for 38.2% of GCC’s share of foreign investments in Q1 this year[3].

China’s investments in the UAE have been rising, with UAE the top destination country (among Arab nations) accounting for more than one-third of Chinese projects tracked during Jan 2003-Mar 2020 (with the number of projects in double-digits in 2018 and 2019). According to AEI’s China Global Investment Tracker, the value of Chinese investments touched a high of USD 8bn in 2018, thanks to a handful of large projects (including with ACWA Power and Abu Dhabi Oil). Sector-wise, investments were concentrated in energy (both oil and gas as well as renewables), real estate and transport – together accounting for 87.8% of total investments during 2016-2020. This is largely in line with FDI inflows into the Arab region as well, with the top 5 sectors (real estate, renewables, chemicals, oil & gas and travel & tourism) accounting for close to two-thirds of total inflows in 2019.
For the oil producing & exporting countries of the GCC and the wider MENA, the broader trade and investment landscape was further disrupted (in addition to Covid19) as a result of the profound changes in the structure and dynamics of the energy sector and market. The deep recession and Covid19 lockdown and induced collapse in transport and travel led to a sharp fall in the demand for oil and cratering of oil prices. Fossil fuel prices are unlikely to recover even in the medium term due to the increasing competitiveness of renewable energy (solar, wind and geothermal), persisting competition from shale oil & gas and new fossil fuel discoveries, while climate change mitigation policies and greater energy efficiency are leading to a downward shift in the demand curve for fossil fuels.  Accordingly, returns on investment in oil and gas (O&G) will decline. The implication is that FDI into the traditional O&G in the UAE and the GCC will be on a downward trend. The challenge will be to attract FDI into viable, sustainable economic diversification sectors and projects.
The new post-Covid19 FDI landscape for the UAE will likely be boosted if the recently announced deep structural reforms are executed well, alongside a review of existing economic strategies. The next obvious step is greater regional integration – a GCC common market (to start with), allowing for free movement of both labour and capital – as well as formalizing trade and investment treaties with major partners including China.
 
 
[1] UNCTAD expects global FDI flows are expected to contract between 30 to 40% during 2020-21.
[2] Source: UNCTAD
[3] Source: Arab Investment & Export Credit Guarantee Corporation

Dr. Nasser Saidi’s article titled “The case for new green deals in the Gulf” appeared in Aspenia Issue No 89-90, issued in Oct 2020, and is posted below. A PDF file of the article can be downloaded here.
 
The case for new green deals in the Gulf
The world is in a “new oil normal”, with permanently lower prices. The oil rich countries of the Gulf need to diversify and focus on clean energy alternatives. Europe has a significant role to play here, too, as the EU and the GCC should develop a strategic techno-energy partnership.
 
The Gulf Cooperation Council (GCC) is weaving its way through two major shocks. Covid-19 and the Great Lockdown resulted in a collapse of oil prices, against a background of climate change and global energy transition. The imf projects an estimated 4.9% decline in global growth this year, with cumulative output losses to the tune of over 12 trillion dollars for the 2020-21 period. Within the GCC, growth is forecast to shrink by 7.1% in 2020, before, optimistically, rebounding by 2.1% next year.
One unintended consequence of the current health crisis has been a record decline in global oil demand, along with emissions reduction and cleaner air as lockdowns were imposed across the globe. I would venture that we are currently in a “new oil normal”, with permanently lower oil prices. It is imperative, therefore, that the GCC’s recovery model include a strong clean energy policy component and structural reforms, alongside a recasting of its economic diversification model and social contracts. The current GCC economic model – over-dependence on fossil fuels, pro-cyclical fiscal policies and generous government subsidies – are unsustainable in the medium to long term.
 
THE PATH LESS TRAVELLED. As countries enter the second phase of the Covid pandemic of easing restrictions along with social distancing norms, there are two divergent paths for economic activity. One track is that government stimuli, together with lower fossil fuel prices, result in diminished incentives to invest in clean energy and clean tech. This will lead to a business-as-usual mode, to a pre-Covid-19 path. Crises and disasters (sars, 9/11, the 2008 Great Financial Crisis) have been associated with temporary dips in carbon emissions, with a 1.5% decline in output associated with a 1.2% drop in co₂. Emissions pick up again, typically with a vengeance, once activity recovers. Recent history provides evidence: it is estimated that following the global financial crisis in 2008-09, carbon emissions increased by 5.9% as a result of policy stimuli.
The second path is a green one wherein countries implement cop21 commitments and energy transition policies, moving to “Green Deals”. This could take multiple forms: we could accelerate the decarbonization of power and road transport, place greater emphasis on energy efficiency investments, phase out subsidies, launch policy incentives to reduce carbon emissions and make a concerted effort to provide no bailouts for industries or business models that are not viable in a low-carbon world. Proactive fiscal policies can help nations become more climate-resilient through investment in climate resilient infrastructure and cities, along with instruments to transfer climate risks to markets (carbon taxes and carbon trading).
According to IRENA’s 2020 “Global Renewables Outlook: Energy Transformation 2050”, decarbonization of the global energy system – away from fossil fuels to renewables – could generate 98 trillion dollars in cumulative growth, adding an extra 2.4% to global gross domestic product. This is a conservative estimate that does not even take into account the negative growth effects of climate change and rising temperatures.[1]
 
CLEAN ENERGY AND CLEAN TECH INVESTMENTS. Governments in the GCC have been vocal supporters of renewable energy projects despite their vast fossil fuel reserves. The Covid-19 crisis has temporarily slowed deal-making in renewable energies in recent months, and this will likely affect investment levels in 2020. In comparison, renewable energy investments in the wider Middle East and Africa slipped 8% to $15.2 billion in 2019, from a record total of 16.5 billion in 2018.[2] The uae was the biggest investor in renewables in the region last year, with the massive 4.3bn Al Maktoum iv solar project, while Saudi Arabia is accelerating investments, with a total 502 million dollars invested (including a windfarm project). Record-breaking bids in renewable energy auctions in Saudi Arabia and the uae have made solar power cost-competitive with conventional energy technologies. The United Arab Emirates is already ahead of the curve in terms of deployed energy storage to support its grid during high demand hours with two NaS battery storage projects in Abu Dhabi and Dubai.
Figure 1 . Investment: Global vs. Middle East

During the pandemic, governments have reiterated their commitment to support renewable energy policies. Recent announcements – Oman’s financial closure of its Ibri ii plant, uae’s upcoming plans to develop the world’s largest solar power plant (2 gigawatt) in Abu Dhabi’s Al Dhafra region (at a historically low price of 1.35 us cents per kWh), came just hours after Dubai awarded a contract for a project (part of a solar park designed to produce 5 gigawatts by 2030) to generate power at a tariff of 1.7 us cents per kWh, confirm the region’s commitment to the sector.
New renewable energy projects in the region are becoming increasingly reliant on private funding (versus government support previously). Private power developers, who can borrow internationally at historically low interest rates, are helping to lower financing costs thereby leading to even cheaper power. The bottom line is that growing private sector participation in energy projects along with technological innovation that is rapidly lowering the cost of renewable energy production and storage, will accelerate the energy transition in the Arabian Peninsula.
Figure 2 . Electricity generation and capacity in the GCC

Source: IRENA Statistics.
NEW GROWTH MODELS. The new oil normal presages permanently lower real oil prices and the prospect that plentiful fossil fuel (including shale), with increasingly ubiquitous, cheap renewable energy, along with energy transition policy and regulatory measures, will lead to an increasing proportion of fossil fuel reserves becoming stranded assets. This poses an existential threat to the GCC countries, though they are among the world’s low-cost producers. The imf estimates that the GCC’s net financial wealth (estimated at 2 trillion dollars at present) could be depleted by 2034, with non-oil wealth depleting within another decade.[3] The policy imperative for the GCC goes beyond recasting economic diversification strategies that are vulnerable to pandemics, to new development and growth models, with a focus on developing “green deals” as well as “blue deals” (given the vulnerability of GCC coastal areas to climate change). All this, while supporting increased economic digitization too. The current combined crises are a wake-up call for GCC governments to design economic recovery programs to accelerate decarbonization and encourage investment in cost-competitive sustainable technologies. Pre-Covid, there were an estimated 6,722 active infrastructure projects with a combined value of more than 3.1 trillion dollars planned or under way in the GCC. These plans should be radically revised to invest in climate resilient infrastructure covering energy, water, transport and cities. Such a well-planned recovery would cut pollution, reduce the outsized carbon footprint of the GCC and also lead to job creation: each million dollars invested in renewables or energy flexibility is estimated to create at least 25 jobs, while each million invested in efficiency creates about 10 jobs.[4] The added macroeconomic benefit is that the GCC would release oil supply for export rather than subsidize wasteful domestic energy-intensive consumption and production activities.
Figure 3 . Energy transition in the Middle East OPEC nations, 2050

Source: IRENA, “Measuring the socioeconomics of transition: focus on jobs”, February 2020.
 
BUILDING BLOCKS OF A RECOVERY PROGRAM. I see four major steps to be taken in order to launch a successful recovery in the Middle East.

1. Structural reforms. The lowest hanging fruit is the phased elimination of fuel and utilities subsidies that are a drain on government finances. Removing subsidies frees up fiscal resources to provide financial incentives for the ubiquitous use of clean energy and clean technology within the broader framework of a “zero net emissions policy”. Regional cooperation is required to support renewable energy growth across the region through a GCC integrated grid, unification of environmental standards along with a removal of barriers to trade and investment, to benefit from large economies of scale and avoid costly and wasteful duplication. A regional GCC grid could change global power infrastructure by creating an energy corridor to East Africa, to Europe through Egypt and to India and Pakistan through a sea cable. Power exports would compensate the GCC for the gradual secular decline of fossil fuel exports through the export of higher value-added solar power.
2. De-risk fossil fuel assets. Across the GCC, state-owned enterprises (soes) and government-related enterprises (gres) are majority owners and operators of upstream and downstream oil & gas (the power sector), while also investing heavily in renewables (even increasing their market share of new capacity relative to private firms in recent years). Given the growing risk of oil & gas reserves becoming stranded assets, the GCC states need to repurpose their soes and gres to support and survive a low-carbon energy transition plan. Saudi Arabia has recently shown the way through the partial privatization of Aramco. The privatization of oil & gas assets should be part of an overall strategy of sharing the risk of potentially stranded assets with investors. Proceeds of the privatization of fossil fuel assets need to be invested in a transformation of the economies of the GCC, sustainable diversification based on partnership with the private sector, with a strategy focused on investing in human capital and sectors capable of competing in increasingly digitized economies.
3. Green financing is integral to fuel climate change policies, for a low-carbon transition. Introducing carbon taxes should be the main plank: such taxes would not only raise revenue and increase energy efficiency, they would provide part of the funding for decarbonization strategies. The imf finds that large emitting countries need to introduce a carbon tax that rises quickly to 75 dollars per ton by 2030, consistent with limiting global warming to 2°C or below. For a country like Saudi Arabia, revenues from a carbon tax (35 to 70 dollars per ton of emissions) could raise some 1.9% to 2.7% of gdp in revenue[5] in addition to reducing pollution, and being the most effective tool for meeting domestic emissions mitigation commitments. The other plank for the capital rich GCC is “green finance”. The financial centers of the region could become regional and global centers for new energy financing, for the issuance of “green bonds” and Sukuk, as well as for facilitating the listing of Clean Energy and Clean Tech companies and funds. Ideally, this should be complemented with the creation of Green Banks to finance the private sector. Such institutions would support energy efficiency policies, retrofit where necessary, make climate risk mitigation investments and so on. The imf has estimated an annual financing gap of 2.5 trillion dollars through 2030 to attain the global targets set through the Paris Agreement and the broader un sdgs. Climate finance reached record levels of $360bn in 2019 – but this remains a tiny fraction of the required amount.
4. The Covid pandemic has accelerated the digitization process as people, governments and businesses have shifted online. The digitization of the energy sector is next through investments in smart grids, smart city technologies and the deployment of new digital technologies, low-cost cloud computing, the IoT, big data analytics, artificial intelligence and blockchain. This is an unprecedented strategic opportunity for the GCC countries to participate in the Fourth Industrial Revolution through the digitization of their dominant energy sectors, with massive “soft” (including training and building digital human capital) and “hard” investments by industry, prosumers, and governments to increase transform their economies and increase overall productivity growth.

 
GEOECONOMIC CONSEQUENCES. The year 2020 will likely witness the largest decline in energy investment on record, mostly due to Covid. A reduction of one-fifth – or almost $400 billion – is expected in capital spending compared with 2019.[6] Fossil fuel supply investments (e.g. exploration) have been the hardest hit while utility-scale renewable power has been more resilient, but this crisis has touched every part of the energy sector. As the energy transition progresses in the European Union and the United States becomes a net energy exporter, it implies less energy dependence on GCC. This lessens the region’s geopolitical and geoeconomic importance. How should the GCC react? First of all, greater regional economic integration is required, with a focus on infrastructure and logistics: energy, water, transportation, digital highways. As noted above, a new energy infrastructure would enable the GCC to shift to selling renewable-energy-based electricity to Europe (via an interconnected power grid), to East Africa, but also to Pakistan, India and East Asia. Secondly, the GCC needs to formalize their shifting trade and investment patterns towards Asia and China through new trade and investment agreements with China, Japan, Korea, and the Asean countries. Thirdly, a new extended Gulf security arrangement needs to be negotiated to reduce arms expenditure and focus on economic development. Finally, the EU and the GCC should develop a strategic techno-energy partnership: the Gulf countries could supply solar-generated electricity, while Europe contributes as a renewable energy and climate change technology partner.
Figure 4 . China-GCC trade and investment

 
[1] Matthew Kahn et al, in their 2019 paper “Long-term macroeconomic effects of climate change: a cross-country analysis”, found that a persistent increase in average global temperature by 0.04 degrees Celsius per year, in the absence of mitigation policies, reduces world real gdp per capita by more than 7% by 2100; abiding by the Paris Agreement limits the temperature increase to 0.01°C per annum, which reduces the loss substantially to about 1%. According to a nasa study, 2010-2019 was the hottest decade ever recorded. A goal of the Paris climate accord was that global temperatures need to be kept from rising more than 1.5°C, but a United Nations report in Nov 2019 found that the world’s emissions would need to shrink by 7.6% each year to meet the most ambitious aims of the Paris climate agreement.
[2] See “Global trends in renewable energy investment 2020”, Frankfurt School-unep Centre, BNEF report, June 2020.
^[3] “The future of oil & fiscal sustainability in the GCC region, imf Working Paper, January 2020.
^[4] IRENA, “Global renewables outlook: energy transformation 2050, April 2020.
[5] IMF, “Putting a price on pollution”, December 2019.
^[6] IEA, “World energy investment 2020”.

Download a PDF copy of this week’s insight piece here.
 
Knowledge-based human capital to drive the next phase of UAE’s diversification efforts
The UAE this week announced an expansion of its current 10-year golden visa to include medical doctors, scientists and data experts as well as PhD holders, in a bid to attract professionals to the UAE. The liberalisation comes on the heels of visas for retirees and options for remote working in Dubai: these provide added incentives for expatriates to remain, invest and contribute further to the country’s development. Currently the UAE residential status for expatriates is linked to an employer, and in the event of job loss, the person has 30 days to either find a new job or secure a new visa. With the backdrop of Covid19 and related job losses – UAE’s PMI Employment sub-index fell to its lowest in over 11 years and the latest November reading falling for the 10th consecutive month –   many long-term residents were forced to return to their home countries, taking their savings back with them generating capital outflows from the economy.
While UAE does not release monthly data on employment, the central bank’s quarterly report offers a glimpse into the recent trend. Construction and services were the largest sectors offering employment within the UAE’s private sector. This is an incomplete picture, as the database on private sector employment excludes the Free Zone activities. For example, the DIFC is home to 2584 firms and over 25k employees while the DMCC last reported 17.5k member companies in the free zone. In terms of pace of growth (in quarter-on-quarter terms), construction has been registering a decline since Q2 last year, though other sectors posted upticks in Q1 (prior to Covid19-related lockdowns). No data is yet available for that period, but Embassy estimates suggest 400k+ (net) and 60k persons having returned to India and Pakistan respectively during the past months.

Structural change signals the UAE’s greater economic diversification
The UAE Ministry of Human Resources and Emiratisation also offers additional details of number of establishments in the country (unfortunately, also excluding free zones). Close to 50% of the firms (as of Jan 2020) were operating in the sectors most affected by Covid19: an update of this data is likely to show a significant difference in the composition. Interestingly, if we consider the number of employees per firm, mining & quarrying (the oil sector) tops the list – in contrast to the capital-intensive nature of the sector.

As is oft-cited, there is a preference to work in the public sector: 78.2% of UAE citizens surveyed in the Labour Force Survey 2019[1] declared as working with either the federal or local government (versus just 12% in the private sector). However, comparing this data with the 2009 survey, the share of the private sector has increased from 58% to 70%- a positive move, and underscoring the UAE’s diversification efforts. By economic activity, a few sectors have seen an increase in their share: manufacturing (9.2% in 2019 vs 7.7% in 2009), construction (17.5% vs 12.3%), hotels and restaurants (5.4% vs 4%). Real estate sector has seen a significant drop during the decade, not unsurprising given the boom prior to 2010; but a slight dip in financial and insurance activities is surprising (2.5% in 2019 vs 3.2% in 2009).
Women are transforming the labour force: more educated but facing a glass ceiling
Another interesting insight from the Labour Force Survey offers a morale booster for women – women are relatively are more educated than their male counterparts (about 50% of employed local women have a bachelor’s degree, and about 60% have a bachelor’s and above; the comparable numbers for expat women are at 33% and 42.8% respectively); a high proportion of women work as professionals and managers (28.5% among female expats, 45% of female citizens). It is time that this translates into having more women on boards and at top management levels in the private sector[2].
The Survey also confirms the disparity in wages between local and expat population: more than one-third of Emirati respondents disclosed receiving monthly wages between AED 20-35k (versus just 5% of expats in the same income bracket). This brings to the forefront two issues:
(a) Private-public sector wage gap that deters citizens from joining the private sector. Though wages by sector breakdown is not available (publicly), it is safe to assume relatively higher salaries in the government sector where close to three-fourths of citizens work. Public sector remains oversaturated, and with higher wages and relatively better benefits, highly educated young people prefer to remain unemployed till they get a public sector job – doing little to help the private sector.
(b) The need to attract high-skilled professionals to support private sector activity. This needs to be carefully addressed: while attracting foreign talent to take up such jobs in the near- to medium-term is necessary, it is critical to reform the education sector and invest in building a knowledge economy. There is a persistent skill mismatch and low educational quality in the country compared to market requirements. Though spending per capita is high and student-teacher ratios are comparable to OECD levels, the outcomes are not strong: the PISA 2018 scores, for example, reveal that UAE students are placed 50th in math, 49th in science, and 46th in reading. Radical modernisation of education curricula is essential for creating a 21st century able workforce. It is also time to invest in curricula that support job-readiness, ‘Digital Education-for-Digital Employment’, early exposure to the workplace (e.g. summer internships and labour policies that facilitate such changes), vocational and on-the-job training. Increasingly the focus should be to invest in and promote STEM (Science, Technology, Engineering and Mathematics) – especially given the official policy focus on innovation and a shift to the digital e-economy and -services in the UAE and the region.
What next? The recent structural reform moves (related to labour) will help remove distortions in the labour market, attract high-skilled professionals and help UAE to diversify into higher value-added and more complex economic activities, while also supporting domestic investment (including in the real estate sector). This will happen alongside a reduction in outflow of remittances, which in turn will boost the balance of payments: last year, UAE expatriates sent $44.9bn in outward remittances in 2019, comparable to the value of oil exports at $49.64bn[3]. It is important in this regard to accelerate capital market development: long-term residents will be keen to invest in medium- and long-term financial instruments, participate in a mortgage market and given an opportunity, also invest in startups and growth companies.
 
 
[1] This is published by the UAE’s Federal Competitiveness and Statistics Authority.
[2] A KPMG report on Female Leaders Outlook identified that 94% of CEOs that participated from the UAE were male. The 2019 UAE report includes input from 50 UAE-based women leaders, up from 29 in 2018.
[3] Data from OPEC’s Annual Statistics Bulletin.

Dr. Nasser Saidi joined as a panelist in the session titled “Post-Coronavirus Economy: Trajectories of Global Order”, at the Seventh Annual Abu Dhabi Strategic Debate organised by the Emirates Policy Centre on 11th November 2020.
The session discussed two broad questions: How long will COVID-19 continue to affect global economy? How will COVID-19 change the global economy in the future?
Dr. Nasser Saidi, the Founder and President of Nasser Saidi & Associates, stated that the global economy is being hit by higher uncertainty as global production has dropped by 4.5 percent, global labour income is estimated to have declined by 11 percent and direct foreign investments have fallen by 15 percent at a minimum in the first half of 2020.
“It is important to realise that world top technology companies such as Amazon, Apple, and Microsoft have developed into major powers in the global arena. The COVID-19 pandemic has demonstrated the need for bridging the digital gaps between various countries and the need for addressing internal divisions in these countries themselves,” he added.
Watch the full session below:

A summary of the event can be accessed at: https://wam.ae/en/details/1395302885959
 

Download a PDF copy of this week’s insight piece here.
 
PMIs & Recovery (?) Indicators in the Middle East/ GCC: A pictorial representation
Chart 1: PMIs in the Middle East/ GCC
PMIs in the Middle East/ GCC have not kept pace with the increases seen across the US/ Europe/ Asia post-lockdown. Non-oil sector activity has been subdued given sector composition, a majority of which are still negatively impacted by the outbreak: tourism, wholesale/ retail & construction.  Job cuts continue as part of overall cost-cutting measures & business confidence remains weak.

 
Chart 2: Stringency Index & Mobility
Most economies in the Middle East are re-opening in phases, with restricted lockdowns where cases are surging. The UAE remains one of the most open (least stringent) nations in the region.
However, when it comes to mobility, the UAE seems to be a few steps behind its regional peers. This seems to be in line with a recent McKinsey finding that countries focused on keeping virus spread near zero witnessed their economies moving faster. So, ending lockdowns and reopening the country is not sufficient for resumption of economic activity. Another potential reason could be that increased use of e-commerce is leading to less footfall in retail and recreational facilities.

 
Chart 3: Indicators of economic activity in the UAE
Last week, the UAE central bank disclosed that its Targeted Economic Support Scheme directly impacted more than 321k beneficiaries including 310k distressed residents, 1,500 companies and 10k SMEs. The overall pace of lending to GREs (+23% yoy during Apr-Aug 2020) and the government (+20.3%) have outpaced lending to the private sector (-0.7%).
UAE banks still lent most to the private sector (70.1% of total as of Aug 2020 vs. 76% in end-2018 and 72% in end-2019), while the public sector & government together account for close to 30% of all loans in Aug 2020 (vs. 25% a year ago). Breaking it down by sector, there has been upticks in credit to both transport, storage and communication (+51.9% yoy as of end-Jun) as well as personal loans for business (+18.7% yoy) while construction sector has seen a dip (-2.9%).

 
Chart 4: Indicators of economic activity in Saudi Arabia
In contrast to the UAE, loans to the private sector has been edging up in Saudi Arabia, growing by an average 13.2% yoy during the Apr-Sep period. Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – are on the rise post-lockdown. Ahead of the VAT hike to 15% in Jul, there was a surge in PoS transactions in Jun, which has since then stabilized. By category, food and beverage and restaurants and cafes, continue to post increases.
Saudi Arabia published its first-ever flash estimates for GDP this week: showing a 1.2% qoq increase in Q3, though in yoy terms, growth was still down by 4.2%.

 
Chart 5: Linkages with the global economy
In linkages with the global economy, we consider

1. Trade: for the GCC region, there was a significant drop in overall trade with the world during the lockdown period. While exports have started to pick up again, the pace of exports to China are relatively faster.
2. Passenger traffic: though international revenue passenger kilometers in the Middle East improved slightly in Sep, it continues to be the worst affected globally in terms of year-to-date data (-68.7% till Sep), as travel restrictions remain. Resumption of domestic travel (e.g. Russia, China) has supported rebounds in some regions.
3. Cargo volumes (cargo tonne-kilometers or CTKs) show a clear V-shaped recovery for the Middle East, due to “added capacity” following the peak of the crisis, according to IATA.

 
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Dr. Nasser Saidi joined Manus Cranny and Yousef Gamal El-din on the 8th of November, 2020 as part of the Bloomberg Daybreak: Middle East edition, to discuss policy priorities for the Biden administration domestically. Also discussed were potential changes in markets (currency, oil) and signs of foreign policy shift.
Watch the interview below – Dr. Nasser Saidi joins from 54:00 till 1:06:20. The original link to the full episode: https://www.bloomberg.com/news/videos/2020-11-08/-bloomberg-daybreak-middle-east-full-show-11-08-2020-video

Download a PDF copy of this week’s insight piece here.
As the world awaits results of the US election, oil prices have settled around the forty-dollar mark. Oil exporters in the region have had to deal with the Covid19 outbreak along with a global recession that have drastically reduced the demand for oil, as well as lower oil prices. Given the resurgence in Covid19 cases and renewed lockdown measures and the global energy transition away from fossil fuels, it is unlikely that oil prices will revert to the levels seen a few years ago, given weaker demand – the IMF’s latest World Economic Outlook puts oil prices, based on futures markets at USD 41.69 in 2020 and USD 46.70 in 2021 (versus an average price of USD 61.39 last year). Fiscal breakeven oil prices in the GCC range between USD 42 for Qatar to USD 104.5 for Oman this year, exerting additional pressure on most oil producers as they ramp up spending to support the economy (UAE’s emirates Dubai and Sharjah announced USD136Mn and USD139Mn respectively in additional stimulus in the last few days).
Oil exporters in the region are still highly dependent on oil revenues, with lower oil revenues implying limited fiscal room and higher fiscal deficits, which are averaging 10% in 2020 for the GCC countries. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable.
The latest numbers from Saudi Arabia underscore the need to diversify away from dependence on oil revenues. Saudi Arabia managed to halve its fiscal deficit in Q3 compared to Q2, as overall revenues edged up by 4% yoy, thanks in part to the 63% surge in non-oil revenues (VAT rate was hiked to 15% From Jul onwards); however, spending increased by 7% yoy, driven by a massive surge in subsidies to SAR 8.2bn (From SAR 2.2bn a year ago) brought on by the need to support the economy during the Covid19 outbreak.

 
Among other GCC nations, Oman, in a bid to raise non-oil revenues, announced plans to introduce 5% VAT from next year, in addition to potentially introducing an income tax (currently being studied). Furthermore, costs of expatriates’ employment visa and work permit renewals will be increased by 5%, with a plan to redirect additional funds towards financing its recently initiated Job Security System. Kuwait meanwhile is facing the highest budget deficit in its history[1]. In Aug this year, the national assembly approved a law that makes transfers to the Future Generations Fund dependent on budget surplus, thus providing a much needed[2] but momentary respite. However, the Parliament is still holding the public debt law – which would allow the government to borrow KWD 20bn over 30 years – hostage. Bahrain’s deficit widened by 98% yoy in H1 this year (as oil revenues fell by 35% and overall revenues by 29%), leading it to issue a USD 1bn bond, while receiving a payment from its GCC neighbours (part of a support package approved in 2018).


Rising fiscal deficits following the previous decline in oil prices and lower growth have resulted in an accumulation of debt across all the MENA countries. The rising debt burdens and their servicing, leave limited space for increasing spending at a time when it is needed to support the economies. The IMF revealed that the median size of revenue and expenditure packages in the region’s oil importing countries this year was double that of oil exporters (2% of GDP versus 1% of GDP). For the GCC, adjustment has resulted from a combination of spending cuts, borrowing from commercial banks, tapping international/ regional markets (bond issuances[3], commercial loans) as well as drawing down from international reserves at the central banks and in Oman’s case direct external financial support from Qatar (with talks ongoing with the UAE, reports FT). As for support from sovereign wealth funds, given lack of transparent data, it will be difficult to gauge the actual value of their support/ contribution, but their optimal role would be to: (a) tap into investments abroad (starting with sale of money market instruments like T-bills); (b) re-assess long-term investment strategies to play a larger role domestically in supporting local industries, innovation and developing digital assets.
Faced with a complex situation, it is little wonder that measures to increase non-oil revenue are being introduced – Oman’s plan to introduce VAT in 2021, rise in visa fees and a potential income tax on high income earners and Saudi Arabia’s VAT hike. To achieve and maintain fiscal sustainability in the long-run, oil exporters will need to move away from pro-cyclical policies, rationalise overly generous and unsustainable entitlement programs, alongside revenue-enhancing measures. The policy agenda is full in the coming years!
 
 

 
[1] Kuwait posted a fiscal deficit of KWD 5.64bn in 2019-2020 (ending Mar 2020): this was higher by 69% yoy and inclusive of a KWD 1.72bn (10% of total annual revenues) transfer to the Future Generations Fund.
[2] The finance minister stated in Aug 2020 that the country has just KWD 2bn (USD 6.6bn) worth of liquidity in its Treasury and it was not enough to cover state salaries beyond Oct.
[3] Abu Dhabi issued a USD 5bn multi-tranche bond; Dubai sold USD 2bn in bonds; Saudi Arabia sold USD 7bn in 3-part bonds; Qatar sold USD 10bn in USD-denominated bonds.
 
 

 
 
 
The op-ed by Dr. Nasser Saidi, titled “How the US elections matter for the Middle East“, appeared in The National on 2nd Nov 2020 and is reposted below.
 

How the US elections matter for the Middle East

The bottom line is that the outcome of the US elections will directly impact a host of global issues
 
The opinion polls largely predict a win for Joe Biden on Tuesday.
FiveThirtyEight, a political analysis website, in its extensive analysis and simulations too favours Mr Biden, barring a major polling error. But a contested election is probably on the cards, given the likelihood that more than 90 million postal ballots – mostly Democrats – are likely to be systematically challenged by Republicans.
With a day left for the US Presidential elections, what would a potential change of guard at the White House mean for the Middle East? What is at stake?
First, a potential return to multilateralism and international co-operation from the current unilateral policies of withdrawal from the Paris climate accord, the Trans-Pacific Partnership or the World Health Organisation or the Iran nuclear deal.
International co-operation – such as the Global Access Facility – will be critical when the vaccine for Covid-19 is ready and needs to be distributed globally.
A widespread availability of vaccines is a global public good. A discriminatory or preferential national treatment would be detrimental to the global economy and hamper recovery from the pandemic.
More broadly, a US reversion to multilateralism would be welcomed internationally. This would mean less confrontation on trade, tariffs and investment policies with China, the EU, Canada-Mexico and others. This would lead to a win globally and – by encouraging non-US trade and investment – result in a cheaper dollar.
Significantly, under a Biden administration, global policy uncertainty, which has been peaking, would diminish. This would, in turn, encourage trade, investment flow and global economic recovery.
Lower, volatile oil prices and a strong dollar along with US tariffs on aluminium and steel, have cost a number of Arab countries over the past four years.
Currently, GCC members are pegged to the dollar. Oil is priced in dollars, trade is dollar denominated – a strong dollar penalises sectors like trade, tourism, transport and logistics that these countries have relied on for economic diversification.
Given the Covid-19 lockdown and the global energy transition away from fossil fuels, it is unlikely – given weaker demand – that oil prices will revert to levels seen a few years ago: the IMF’s latest World Economic Outlook puts oil prices, based on futures markets at $41.69 in 2020 and $46.70 in 2021 versus an average price of $61.39 last year.
But a likely cheaper dollar under Mr Biden would support an economic recovery in the region, driven by the non-oil sector, tourism and services exports – and as countries reopen in phases – also in foreign investment in real estate.
The impact on the oil market will be more important.

This panel session, broadcast on 7th Oct 2020, was part of the Middle East and Gulf States session at World Energy Week LIVE on the theme “Managing Energy Transition in the Middle East”

The session can be accessed below:

Download a PDF copy of this week’s insight piece here.
FiveThirtyEight, in its extensive analysis and simulations, favours Biden to win the election, barring a major polling error. A contested election is probably on the cards. But, with less than a week left for the US Presidential elections, what would a potential change of guard at the White House mean for the Middle East? Interestingly, a recent YouGov-Arab News survey shows that respondents have little confidence in either candidate: only 12% preferred Trump versus 40% for Biden.
First and foremost is a potential return to multilateralism and international cooperation from the current (unilateralism) policies of withdrawal from the Paris climate accord, the Trans-Pacific Partnership or the World Health Organization or the Iran nuclear deal. International, multilateral cooperation – such as the Global Access (COVAX) Facility – will be critical when effective Covid19 vaccines are available to be rolled out and need to be distributed globally. A discriminatory or preferential national treatment would be detrimental to the global economy and recovery. More broadly, a US reversion to multilateralism would be welcomed internationally: less confrontation on trade/ tariffs and investment policies with China, the EU, Canada-Mexico and others would lead to a win-win globally and would lead to a cheaper dollar by encouraging non-US trade and investment.
Lower oil prices and a strong dollar along with US tariffs on aluminium and steel, have been strong headwinds and costly for the GCC. Currently, GCC members are pegged to the dollar (Kuwait pegs a basket dominated by US$), oil is priced in dollars, financial assets are largely dollar denominated, trade is dollar denominated and dollar financing is popular, while bond issuances have been on the surge (taking advantage of globally low borrowing costs) as nations adjust to rising fiscal deficits. Given the Covid Great Lockdown, the energy transition away from fossil fuels, it is unlikely that oil prices will revert to prices seen a few years ago given weaker demand – the IMF’s latest World Economic Outlook puts oil price, based on futures markets at USD 41.69 in 2020 and USD 46.70 in 2021 (versus an average price of USD 61.39 last year). But a cheaper dollar would support an economic recovery in the region driven by tourism and services exports, as countries reopen in phases.
More important, will be the impact on the oil market. A re-elected Trump administration would continue its policies supporting US shale oil, encourage drilling and roll back of climate-related regulations and support US oil & gas exports, weakening OPEC+ and oil prices. By contrast, a Biden Administration would be climate and environment policy friendly, revert back to the Paris Agreement, support renewable energy, including through “Green” and “Blue” New Deals. In a scenario where fossil fuel demand is already weak, an additional push towards renewables would tend to reduce US supply but also reduce demand, the oil price impact would depend on the balance between demand and supply effects.
Oil exporters in the region are still highly dependent on oil, with lower oil revenues implying limited fiscal room and higher fiscal deficits which are averaging 10% in 2020 for the GCC countries. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable. The elephant in the room remains the risk of being left with stranded assets. According to the IEA, stranded assets refer to “those investments which have already been made but which, at some time prior to the end of their economic life, are no longer able to earn an economic return”. The strategy imperative is the need to emphasise diversification policies, along with a policy to de-risk fuel assets. National oil companies and related state-owned enterprises, that are majority owners/ operators of oil and gas assets, would need to pursue a low-carbon energy transition plan in addition to the privatisation of fossil fuel assets. Examples are the Aramco part-privatisation, and ADNOC’s part-pipeline privatisation. This should be complemented by a major drive to accelerate investment in and adoption of green/ clean energy policies by both government entities and the private sector.
The bottom line is that the outcome of the US elections will directly impact a host of global issues from dealing with Covid and climate change, de-escalating confrontation and preventing a Cold War with China, restoring confidence in multilateral agreements and institutions like the WHO, the WTO, the UN and geopolitics, with repercussions on regional power struggles involving Israel, Iran, Turkey and the Gulf states. Important as these issues are, the other bottom line is the need for a renewed focus of the GCC and the regions oil producers on economic diversification strategies and de-risking fossil fuel assets within a well-designed energy transition strategy.
For additional views about this and the wider regional economic outlook, listen to the IMF panel discussion from yesterday.

Dr. Nasser Saidi participated as a panelist at the IMF’s event related to the Regional Economic Outlook report for the Middle East and North Africa region held on 27th October, 2020.
The panel discussion was titled “Coping with Covid19: Challenges & Policy Priorities for the MENA region and the Global Economy” and discussed in addition the impact of US elections on the Middle East.
The IMF report can be accessed at https://www.imf.org/en/Publications/REO/MECA/Issues/2020/10/14/regional-economic-outlook-menap-cca
Watch the video of the webinar below:

Dr. Nasser Saidi joined Manus Cranny on the 25th of October, 2020 as part of the Bloomberg Daybreak: Middle East edition,to discuss the US presidential elections and impact on markets, in addition to economic recovery prospects amid the Covid19 pandemic’s resurgence and discussing the much-needed steps to recovery under the newly appointed PM in Lebanon.
Watch the interview below – Dr. Nasser Saidi joins via phone (from 1:01:00 till 35:42). The original link to the full episode:  https://www.bloomberg.com/news/videos/2020-10-25/-bloomberg-daybreak-middle-east-full-show-10-25-2020-video

Download a PDF copy of this week’s economic commentary here.
Fig 1. Global Economic Growth to decline by 4.4% this year, before rebounding to 5.2% in 2021

The IMF’s World Economic Outlook, released in October, forecast upwardly revised growth estimates for most country groups this year though stating that the recovery is “long, uneven and uncertain”. The IMF forecasts still seem relatively optimistic with all regional aggregates indicating a wobbly V-shaped recovery. Emerging markets and China are expected to recover much faster than their advanced counterparts while also noting that the plunge in growth was more severe for the advanced nations. A recovery in trade, PMI numbers and consumer spending are cited as supporting global recovery, though the sudden surge in Covid19 confirmed cases across Europe is likely to dampen the rebound, presaging a second wave and extended recovery.
Germany, Italy, Portugal and UK recently reported their highest number of infections since the start of the pandemic and many nations are reimposing restrictions – Belgium’s nationwide curfew, Switzerland making masks compulsory in indoor public areas, a 9pm curfew at many major cities in France – though a full-fledged lockdown is likely to be avoided. While Q3 may show an uptick in growth, Q4 is likely to slide back into negative territory (though not as sharp as Q2’s plunge). Mobility indicators how a decline in footfall across many European cities (https://on.ft.com/2TmvOkZ); PMI data reveals a divergence between manufacturing and services, with the latter reporting a drop in Sep. As we enter the cold winter months, the partial recovery seen in Q3 may be just temporary.
In the Middle East and North Africa (reeling from the effects of the global recession, Covid19 impact and oil exporters facing lower oil prices and demand), growth is expected to recover a tad later and slower compared to the rest, rising to only 3.2% from a 5.0% dip this year (Source: IMF Regional Economic Outlook: Middle East & Central Asia, Oct 2020). Egypt is the only country in the region forecast to grow this year (+3.5% yoy in spite of the massive decline in tourism). GCC growth is forecast to shrink by 6.0% this year – with oil and non-oil GDP contracting by 6.2% and 5.7% respectively.

A recent uptick in Covid19 cases might add to economic uncertainty in the region – Jordan has reimposed some restrictions since the beginning of the month, but none of the nations have gone back to the stringency levels seen during Mar-Apr 2020. The immediate concerns remain on the fiscal side, with most nations rolling out stimulus packages to ease the impact from Covid19. For the GCC, fiscal deficits are projected at 9.2% of GDP this year (2019: -2%) while the fiscal breakeven oil price ranges from USD 42 for Qatar to USD 75.9 for the UAE and as high as USD 104.5 for Oman. Dependence on oil is still pronounced in spite of diversification efforts and the rising fiscal deficits are being met with a combination of debt issuances, tapping domestic markets, reduction of reserves and via sovereign wealth funds.
Though countries in the Middle East emerged from Covid-19 containment in Q2, the economic costs/ impact are likely to be protracted through the year and next given the many spillover risks: debt obligations and financing needs, job losses/ unemployment, potential NPLs affecting banking sectors, business closures leading to insolvency/ bankruptcy, and for the oil importers decline in remittances as well as rising poverty and inequality. IMF estimates foresee that five years from now countries could be 12% below GDP level expected by pre-crisis trends.
 
 
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Download a PDF copy of this week’s economic commentary here.
1.Global PMIs, shipping & trade

PMIs across the globe were released last week. The headline JPMorgan global composite PMI fell for the first time in five months, dipping to 52.1 in Sep (Aug: 52.4). Most manufacturing surveys still indicated an expansion (a reading above 50) though the pace of recovery has slowed as a result of capacity constraints and supply chain delays. Sector-wise, the most significant beneficiary has been the automotive sector, where production capacity increased and new orders posted the most gain since Dec 2019. On the other extreme, tourism and recreation sector continues to be the worst hit – reflecting the glaring divergence between the manufacturing and services sector PMIs (Figure below). September’s PMI readings in the services sector have declined from Aug’s 7-month highs, as many countries witnessed a resurgence in Covid19 cases (and in some, new record daily cases!), leading to restricted lockdowns which added on to the restrictions due to social distancing policies. Employment posted a net increase for the first time since Jan: though jobs growth was faster in the services sector in Aug-Sep, remember that the sector had also seen the steepest job cuts earlier this year.

 
Recent manufacturing PMI readings have shown an increase in new export orders, supported by a pickup in demand. Global shipping indicators have improved during the summer, with both the Baltic Exchange Dry Index (tracks rates for ships carrying dry bulk commodities) and the Harpex shipping index (index created using container shipping rates across different classes of ship) picking up pace. Both indices rose to its highest in more than a year last week, after having touched 3-year highs in mid-2019 and declining sharply during the Feb-Jun period. However, the air freight sector has not recovered in tandem with shipping (Figure below), a result of cheaper ocean trade – a pattern visible during downturns – as well as insufficient air cargo capacity (according to IATA).

2. Regional PMIs

 
Regional non-oil private sector PMI’s indicate a slow restart: Sep’s modest improvement followed Aug when four of the countries moved into the contractionary territory (i.e. below the 50-mark). Significantly, demand growth has been picking up and the significant price discounting on offer has led to an increase in sales.
Job cuts are still occurring, as businesses adjust to reduce operating costs. The ILO estimates that Arab states witnessed a 2.3% drop in working hour losses in Q1 this year, followed by 16.9% and 12.4% respectively in Q2 and Q3. Job postings are slowly ticking up, though anecdotal evidence suggests that potential employees are willing to accept a significant pay cut to undertake similar work. This will lead to a wider disparity in public-private sector wages, not to mention the impact it would have on wider gender disparities (during Covid19, women are already more likely than men to witness a larger drop in mobility to lose jobs in the informal economy or see a reduction in working time).
Furthermore, with lack of access to finance/ liquidity, not all businesses will recover or survive in the next few months, should uncertainty remain. This could result in a structural change bought about due to Covid19 (e.g. the increase in number of online shopping platforms which are relatively less labour-intensive versus actual physical stores). Being faced with limited financial capabilities (due to job losses or salary cuts and depletion of savings), expatriates could also decide to return to their home countries (negatively affecting consumer spending in the region).
3. Stringency Index vs. Retail and Recreation sector activity
The Middle East has seen a resurgence in Covid19 cases in the recent weeks, and many nations are in the process of reimposing partial lockdowns or shorter nationwide lockdowns: the first panel in the figure below shows that the Government Response Stringency Index[1] has increased for the UAE in the past month (in line with the increase in cases). This is the best way forward, if we are to take into consideration the IMF’s recent World Economic Outlook analysis which found that early adoption of stringent and short-lived lockdowns curbed infections and could be preferable to mild and prolonged measures. The enforcement of lockdowns and social distancing policies was an important factor contributing to a recession: however, such short-term costs of lockdowns may lead to medium-term gains if the virus is contained.

Google Mobility indicator for retail and recreation show that none of the three nations – Bahrain, Egypt, or UAE – have yet returned fully to the pre-Covid19 baseline. Among the three, Egypt, which had declined the most initially, recovered faster in comparison. More interestingly, within the UAE, recovery in retail sector mobility in Sharjah (-14% from baseline in Oct) and Abu Dhabi (-21% from baseline) has outpaced Dubai (-23%). This could potentially be due to higher confidence in these emirates – given mass testing in Sharjah, border controls in Abu Dhabi and a relatively longer lockdown period – compared to Dubai.
What next? Note that a second (or even third) wave  of Covid19 is unfolding, as we enter the cold winter months: given the likelihood of resurgence of Covid19, partial recovery – as indicated by PMIs – may be temporary. If further virus containment measures are introduced, though it will dampen economic activity in the short-term, medium-term gains might be achieved. Initial restrictions will likely affect the customer-facing service sectors more than others, but risks to other sectors will increase if further restrictions are imposed. Overall, an air of uncertainty is unlikely to boost confidence among firms, negatively affecting investment decisions and economic activity. Governments need to signal willingness to continue stimulus measures if required and take decisions to introduce “circuit-breakers” if necessary.
 
[1] The Stringency Index is a composite measure based on nine response indicators that include school closures, workplace closures, and travel bans; the index ranges from 0 to 100 with 100 being the strictest. This index does not track the effectiveness of the response. More: https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker
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[This is an edited version of the post issued originally on 29th Sep; Table 1 & related text have been updated]

Supporting the recovery of UAE’s private sector: focus on SME finance
To support the UAE economy in the backdrop of Covid19, the central bank (since Mar 2020) has rolled out a number of measures including liquidity injection via loosening of banks’ capital requirements, loan repayment deferrals and the Targeted Economic Support Scheme (TESS) among others. According to the UAE central bank, as of end-Jul, banks and financial institutions had availed AED 44.72bn worth of interest-free loans (89.44% of total) as part of the TESS facility. It needs to be highlighted that banks used close to 95% of these funds towards postponing loan payments for the affected sectors. It was also disclosed separately that 300k individuals, 10k SMEs and more than 1500 private sector firms had used the economic stimulus.

The latest data from the UAE central bank shed some light on the broader credit movements: the accompanying chart shows the monthly changes in gross domestic credit. The dotted lines are credit to businesses and individuals (the private sector) which show no substantial increases – in fact, it increased by an average 0.9% year-to-date (ytd) for businesses and dropped by 2.1% ytd for individuals. The uptick in lending to the public sector (government related entities) and government have been discussed previously here and here, but the non-bank financial institutions (which include private equity & venture capital firms, other investment firms, alternative asset managers, insurance firms and others) has also witnessed a 11.8% rise in credit ytd. There is not much visibility of the activities of NBFIs in the UAE (in terms of publicly available data), and it is not clear if the SME customer segment, important for recovery, was catered to (via consumer finance, SME financing & credit card products, to name a few).

However, at the risk of sounding like a broken record, the question is whether the package has achieved its goal of supporting the economy or whether it resulted in a crowding out of the private sector (businesses and individuals) in favour of the government, public sector & also the financial institutions? The UAE central bank’s latest quarterly report does mention that MSMEs (Micro, Small and Medium Enterprises) benefitted from the economic package – highlighting the 10.4% yoy increase in lending in Q2 this year. But, at the end of the day, share of SME lending in total domestic lending was at 5.7% in Q2 (Q2 2019: 5.6%), lower than 5.9% share as of end-Q1.

Additional data is beneficial: the tables below provide more details of bank lending to the MSMEs, segregated by micro, small and medium enterprises[1]. Within the MSME segment, as of end-Q2, the largest share of loans was disbursed to medium-sized firms (56.6%) and close to 1/3-rd to the small enterprises.

The number of MSMEs in the UAE have increased by 3.9% qoq to 124,935 as of end-Jun – not surprising given the central bank’s mandate of reduced duration for opening new SME accounts (all banks need to open accounts for SME customers within a maximum timeframe of two days, provided documentation and AML/CTF obligations are met). The number of accounts in the micro- and small segments increased by 4.6% and 5% qoq in Q2. Nevertheless, if we consider the amount disbursed per firm, medium enterprises pocketed AED 1.76mn in Q2: this is 3.7 times the amount disbursed per small firm and more than 5.3 times the amount disbursed to microenterprises.

The results are quite eye-opening, but not surprising (unfortunately): the GREs have benefitted in terms of the pace of overall domestic lending during the Covid19 period (remember that many of these firms are part of the sectors most affected by the pandemic!) and while lending to the SMEs has been dismal, within the SMEs, the medium-sized firms have benefitted the most. Considering how significant SMEs are to the UAE[2], it is imperative that financial institutions support them to bring the economy back on track. Some of the policies rolled out by the central bank had a 6-month deadline, and since no announcements have been made (yet) regarding extensions, anecdotal evidence points to banks winding down loan repayment deferrals and similar policies (for businesses/ individuals).

With the economy not yet back on the pre-Covid19 track, and the central bank’s own call of a 4.5% decline in non-oil GDP this year, targeted policy stimulus measures need to continue. With rising indebtedness of both individuals (due to job losses or pay cuts) and businesses (directly and indirectly affected by Covid19), there are likely to be spillovers into the financial sector via rising non-performing loans.

Furthermore, as companies wind down operations in the near- to medium-term, nascent insolvency and bankruptcy frameworks in the UAE are likely to be tested. According to the World Bank Doing Business 2020 report’s resolving insolvency sub-category, the UAE’s recovery rate was 27.7 cents on the dollar (vs OECD high income nation’s average of 70.2 and MENA average of 27.3), at a cost of 20% of the estate (vs 9.3 in OECD and 14% in MENA), taking 3.2 years to resolve (vs OECD’s 1.7 and MENA’s 2.7)[3]. However, the strength of the insolvency framework – given recent but untested legislation – stood at an impressive 11 (out of a total score of 16; compares to the OECD average of 11.9 and higher than MENA’s 6.3).

Support of the private sector is critical for economic recovery
To provide adequate ongoing backing to the private sector (including the SMEs) is essential. What policy measures need to be in place? (a non-exhaustive list)

• Banking sector continues to support the private sector via reduced bank charges and fees, reduction in minimum balance requirements, zero-interest instalment plans etc.; of course, banks’ compliance/regulatory departments need to ensure that firms they lend to follow practices of good financial reporting and governance.
• Limited funding to SMEs from the banking sector is likely to continue, given the current status of opaque information/ reporting/ data. Lack of collateral and issues of transparency are oft-cited constraints to SME lending in the region. The recently announced credit guarantees for loans to SMEs is likely to provide support and if successful, could be continued at a nominal rate. Open lines of communication with the credit bureaus can help manage credit risks and ease SME’s access to credit. Two ways to resolve the issue of collateral: 1. Expand the nature of acceptable collateral to both movables and immovables; 2. Establish transparent, blockchain-based collateral registries/ platforms. Furthermore, an SME rating agency (like in India) could provide additional information to lenders. Resolving this constraint alone could kickstart a new wave of entrepreneurship in the country.
• Backing from the government can come via a simple move like reducing the cost of doing business (various free zones have reduced fees and related charges for a short period) or ensuring no payment delays or boosting specific sectors (Abu Dhabi’s recent announcement to develop AgriTech) or through a wider mandate by instructing the various sovereign wealth funds to invest in local companies, through a dedicated fund, based on best practices.
• Leapfrog on the massive changes Covid19 has brought about in the adoption of technology: varied e-commerce offerings, such as helping SMEs establish interactive websites, to creating innovative payment systems to neo-banking options. Alongside embracing the technology and greater digitalisation, it is necessary to also invest in and create the right ecosystem (bringing together the necessary skillset, retraining existing employees, reducing set-up and ongoing/ recurring business costs etc.).

[1] The UAE central bank expanded the definition of SMEs so that a larger segment will be in a position to qualify for SME lending. 

[2] According to Ministry of Economy, the SME sector represents more than 94% of total firms operating in the UAE, accounting for more than 86% of the private sector’s workforce. In Dubai alone, SMEs make up nearly 95% of all companies, employing 42% of the workforce and contributing ~40% to Dubai’s GDP.

[3] https://www.doingbusiness.org/content/dam/doingBusiness/country/u/united-arab-emirates/ARE.pdf

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Charts of the Week: Saudi inflation numbers (consumer & wholesale prices) show the impact of the tripling of VAT. For now, a proxy indicator of cement sales is showing a pickup post-lockdown, in spite of the VAT hike. We also track the recent changes in Saudi exports, also to understand the impact on government revenues.

1. Saudi inflation picks up post-Jul’s VAT hike

Headline inflation has been climbing in Saudi Arabia from Jul, not surprising given the VAT hike to 15% (from 5% before). The VAT effect is seen across multiple sub-categories, but note that food prices have been ticking up for many months now. Wholesale prices have also increased, similar to when VAT was initially rolled out in 2018, with metal product prices leading the way: these hikes will also filter down to the end-user.

Household spending will be negatively impacted by the VAT hike (as seen from recent SAMA data), there seems to be an increase in cement sales – a proxy for the construction sector spending – after the expected dip during the lockdown period. This could be a result of work continuing on mega-projects like NEOM in addition to a boost from the housing market. The surge in mortgage loans this year (+94.4% year-to-date, with the value in Jun 2020 more than three-times compared to Jun 2019) and the announcement that homes priced at SAR 850k and below will not be subject to VAT will support the housing market. Risks of a severe slowdown in government spending and/or delayed payments could however affect near-term demand.

2. Oil sector in Saudi Arabia

The latest trade data from Saudi Arabia shows a drop in overall exports in Q2 this year (-53.6% yoy): oil exports were down by 61.8% yoy, and the share of oil exports fell to 64% in Q2 2020 vs 77.5% in Q2 2019. Partly attributable to the OPEC+ cuts and overall weak global demand for oil (given Covid19), this implies a substantial reduction in government revenues from oil (in 2019, an estimated 63% of total revenues was derived from oil). At the same time, non-oil revenue will also have declined: government’s postponement of some taxes and fees will bite into revenues and lockdowns would have negatively affected private sector activity.

Q1 has already posted a budget deficit of SAR 34.1bn, and the IMF estimates (as of June 2020) overall fiscal deficit to widen to 11.4% of GDP this year from 4.5% a year ago. Fiscal consolidation efforts have been a cornerstone of every reform discussion and will likely continue to be – removal of subsidies, reducing public wage bills, raising non-oil revenues – at least in the near-term. This will likely be accompanied by more international debt issuances to finance the deficits, in addition to developing its fledgling local debt market.

The recently released data on world energy from BP shows that though Saudi Arabia is now the second-largest producer of oil globally (behind the US), its proven reserves still account for 17.2% of overall global reserves. But, with the rising rhetoric that oil demand may already have peaked, the pertinent question is whether oil could end up being a stranded asset sooner than later. In this backdrop, with the Covid19 pandemic and a resultant push for climate change policies (before it is too late), it is imperative that the recovery model for Saudi Arabia (and rest of the fuel-exporting nations) includes a strong clean energy policy component within overall reforms, alongside a recasting of its economic diversification model and social contracts.

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Charts of the Week: This is a crucial period for GCC, including the UAE. How can one decide on the balance between reopening the economy, supporting economic activity, while also containing the spread of Covid19? What policy measures should top the list to support businesses and consumers?

1.Spread of Covid19 in the GCC/ UAE
Confirmed Covid19 cases in the Middle East has crossed 1.75mn, with the GCC nations accounting for 43.7% of total cases. Many of these nations have seen a recent spike in cases, after stay-at-home orders and travel restrictions were lifted in addition to reopening previously constrained activities (e.g. mosques, gyms, salons). Among the GCC nations, the spread of the outbreak is still varied. The chart on the right maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases.

Among the GCC nations, Oman seems to be relatively better off – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people; not surprising considering that it is the most “stringent” among the group – the Oxford Covid-19 government response stringency index[1] places Oman at 86.11 vs the least stringent being UAE at 36.11 (Sep 2020). The UAE, which accounts for one-fourth of GCC’s GDP, has the highest 7-day average of daily increase in Covid19 cases (size of bubble). While officials have stressed the need for greater adherence to social distancing measures, no lockdown has been imposed as yet. Within UAE, Dubai is already welcoming tourists subject to Covid19 negative tests.

Source: Worldometers, Our World in Data, Nasser Saidi & Associates. The size of the bubbles on the RHS chart denotes the 7-day average of daily increase in cases.
This implies a sharper downturn in GDP this year due to the outbreak, while the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. Given the large proportion of expat population in the country, a dip in growth will also spillover into the labour-importing nations: ranging from job losses (& the return of these residents to home countries), as well as lower remittances. In anticipation of lower growth this year, the government and central bank have rolled out private sector stimulus packages to support the economy, while reducing expenditures (UAE posted a record budget surplus of AED 9.75bn in Q2 this year). The Federal ministries have reduced spending (including compensation of employees), with overall cuts in capital and infrastructure spending will be detrimental to economic growth.

To compensate from lower oil prices and lower non-oil fiscal revenues, borrowing from international capital markets has gathered steam: so far this year, Abu Dhabi issued a USD 5bn multi-tranche bond (that included a 50-year tranche – the longest term for a bond issued by a GCC sovereign issuer) after having raised USD 10bn previously this year, while Dubai government sold a USD 2bn dual-tranche in early-Sep (the prospectus also disclosed that the emirate had raised over USD 3.6bn in debt this year through several instruments, used to support Emirates Airlines and expenses related to the Expo). An important point to highlight is that though Dubai government debt is placed at USD 34bn, the exposure of government-related enterprises (GREs) were not disclosed – an amount estimated at more than USD 120bn by the IMF. A related point was mentioned in the previous weekly insights: bank credit to the public sector and government are rising, threatening to crowd out lending to the private sector (which recorded a 0.1% yoy dip in Jun).

2. Economic Activity in the UAE: PMI, Mobility Indicators & Traffic Congestion

PMI for both UAE and Dubai (most dependent on non-oil sectors) declined the most in Apr – to 44.1 and 41.7 respectively. Following that dip, the PMI readings have been rising in both UAE and Dubai, though it came to a halt in Aug. Employment continues to be the biggest drag on the index (the sub-index was at the lowest in 11 years in the UAE while in a 6^th consecutive month of contraction in Dubai) while a rise in sales and related spending was attributed to steeper price discounting (respondent firms generally pointed towards subdued customer demand, not surprising given the wider economic uncertainties).

Retail and recreation readings are just under 15% lower than the baseline case in the UAE. There is however a slight difference between Dubai and Abu Dhabi with the latter having recovered faster – probably more confidence as result of specific lockdown restrictions (i.e. need to provide a negative test result to enter the emirate). Workplace is still 25% lower compared to the baseline – possibly the result of working from home policies in many firms. Congestion statistics already show a slow pickup – but below pre-Covid19 levels – more so in Dubai than Abu Dhabi.

3. Policy recommendations for the UAE
As businesses adjust, governments can provide stimulus support to facilitate transition to the new normal. The focus in this section is businesses and consumers. The main immediate concern for firms is operating costs and cash flow: lowering rents/ license fees or offering installment plans for payment of license fees/ rents would help ease financial burdens. Additionally, the government could offer grants to support firms’ digitalization/ roll out of innovative processes. Strains on businesses could have a spillover effect on the banking sector via non-performing loans or increased flight risk of business owners unable to meet repayments. Towards this end, an extension of loan repayments deferment should be considered by the central bank (this has already been done by other GCC nations). Banks should also be nudged to lend to the SMEs and not just already “established” firms with a better financial standing: this could take the form of working capital loans or trade loans, with a SME guarantee scheme (specifying criteria for eligible lenders and the assessment process).

As firms’ lower headcount to adjust, it would be beneficial to remove barriers to labour mobility (e.g. allowing part-time work visas/ freelancing options versus being tied to a specific company): this would allow employees (and families) to remain in the country to search for alternative jobs (and continue school, visit malls and use hospitals among others thereby contributing to overall consumer spending). Ensuring that sudden job losses will not require a move back to their native country, will increase confidence to invest in the economy (be it real estate or starting new business ventures). A longer-term policy would be to establish social security nets and/or unemployment insurance to reduce financial burdens alongside jobs support schemes.

[1] Check https://ourworldindata.org/grapher/covid-stringency-index?year=latest&time=2020-01-22..latest

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In the August 25th, 2020 edition of Bloomberg Daybreak: Europe, Dr. Nasser Saidi speaks to Manus Cranny and Annmarie Hordern on US presidential elections, China’s economic recovery amid Covid19, clashes with the US administration, the euro & ECB,  Brexit & the UK economy.
Watch the interview below – Dr. Nasser Saidi joins via phone (from 07:05 till 35:42). The original link to the full episode: https://www.bloomberg.com/news/videos/2020-08-25/-bloomberg-daybreak-europe-full-show-08-25-2020-video

The Beirut blast and its recovery/ reconstruction dominate news in the Middle East. Our take on the path for Lebanon’s economic recovery is part of this Weekly Insight edition. Given the scheduled global PMI releases last week, we take a close look at the region’s PMIs and Mobility indicators in parallel. Also covered are the latest monetary indicators from Saudi Arabia and FDI flows in the Arab region (Q1 2020).     

1. Beirut blasts and Lebanon’s way forward

The Beirut port explosion on Aug 4th – which left at least 158 people dead, 6000 injured and 300k homeless – was possibly the last straw for the people already immiserated by an economic, banking & financial meltdown (since Oct 2019) alongside dealing with the Covid19 outbreak. The explosion led to calls for resignation of the government (three ministers have resigned, including after the blast, citing failure to reform), with demonstrations gaining traction over the weekend. In addition to the loss of human lives and destruction of buildings (homes and businesses), it is critical to understand the importance of the ports: 80% of the country’s food imports come through the port, in addition to medical supplies as well as oil and gas. The silos have been demolished (which hold 2-3 months supplies of grain), leading to shortages of food (& higher prices – food inflation had surged by 108.9% in H1 2020 and by 250% in Jun 2020); expedited imports of food and fuel will also be constrained by damaged logistics (transport and warehouses). Additional cuts in electricity (given the impact on fuel supplies) will negatively affect hospitals (that are fighting the Covid19 outbreak in additional to normal operations) and businesses.
Damage to infrastructure (port, transport, logistics and related facilities), housing and businesses is extensive. A detailed survey will be required to assess the total costs of reconstruction but it is clear that Lebanon does not have the fiscal space and will require international support. The destruction will further depress economic activity through a negative impact on consumption, investment and export activity. We forecast an overall reduction in real GDP by some 30% (Great Depression levels) along with continuing and potentially accelerating inflation.  Beirut’s governor stated (without presenting evidence or survey estimates) that the repair bill for the capital alone will cost up to USD 5bn while overall cost of damages is estimated at around USD 15bn. The Cabinet’s approval of an exceptional allocation of LBP 100bn [or USD 26.3mn at the central bank’s set rate of LBP 3,800 to the USD at money transfer firms] to deal with the crisis will fall way short of requirements. International donors pledged EUR 252.7mn for humanitarian aid at the Paris conference yesterday held to raise emergency relief for Lebanon. President Macron during his visit to the location stated that he would “propose a new political pact” to all political forces in Lebanon, also assuring that aid would “not go to corrupt hands”.
The way forward is to undertake a comprehensive series of macroeconomic reforms, including at various sectoral levels – ranging from reforms of the power sector to the banking sector, to exchange rate reform alongside an active intent to increase transparency and stamp out corruption. So far, there has been a refusal by the authorities to bite the bullet and undertake reforms. The donor conference yesterday (as well the CEDRE pledges in 2018) are promising: but the aid should only be released within the umbrella of a broader IMF programme – with clear conditionalities of reform (and potentially bringing in independent ‘technocrats’ to form a new government). The country is in urgent need of an equivalent of a Marshall Pan (size of USD 25-30bn and growing), given cumulative losses owing to lack of reforms so far.

Source: Khatib & Alami.

2. PMI Activity recovers across the globe, including in the Middle East

Global manufacturing PMIs mostly ticked up, given rebounds in both output and new orders. India was one of the nations reporting a lower PMI in Jul: unsurprising given the fast pace of Covid19 confirmed cases – it took only 9 days for India to go from 1.5mn to 2mn – and restricted lockdowns in parts of the country. In spite of the V-shaped recovery in PMI, all is not smooth: restrictions have not been eased fully, demand is largely domestic-driven, and supply chains issues remain – average vendor delivery times lengthened for the 12^th consecutive month for global manufacturing PMI. A resurgence in cases/ 2nd and 3rd waves will only add to the burden.

3. What can we learn from the latest PMI & Mobility indicators?

PMIs in the region indicate a sharp V-shaped recovery following the lockdown period, but is it too much optimism from those surveyed? Order books have improved, though export orders remain weak, indicating domestic demand driving the rise.
This is reflected in the retail and recreation segment of the Google Mobility indicators: with less stringent restrictions in place, movements were higher in the days running up to the Eid Al Adha holidays (across the three nations) while in Saudi Arabia, a similar trend was also visible towards the last week of June, ahead of Jul’s hike in VAT. For firms in the retail and recreation sector, social distancing measures are likely to eat into the firms’ profits (if any) and the road to recovery is likely to be slow. In spite of marketing efforts, it will be affected by spending capacities, salary reductions/ cuts in allowances/ job losses & return of expat labour to their home countries (e.g.~500k Indians have registered for repatriation flights from the UAE).
Workplace mobility is still around 20% below the baseline numbers (excluding Eid holidays): widespread availability of telework technology and the feasibility of performing work remotely has kept firms operational. However, those sectors where work from home is not the ideal option (think retail, tourism, hospitality), the learning curve has been steep – e.g. retail firms’ rolling out previously unavailable online options.
Bloomberg reported that while working from home, workdays were longer by 48.5 minutes, with 1.4 more emails sent to colleagues per day and an 8% increase in emails sent after hours (questioning the work-life balance and happiness quotient) though offering more flexible work hours (and potentially higher productivity levels). The UAE government’s announcement of flexible working hours for its staff is a good move to raise productivity, reduce peak hour traffic and can act as a precursor for the private sector to emulate. The obvious next step is providing the option for employees to work from home, when possible – think of either shorter work hours (in the office) daily or working from home a full workday during the week.

4. Saudi Arabia: monetary indicators

Monetary statistics for Jun 2020 in Saudi Arabia reinforce the trends from the Mobility indicators in the previous panel. Both indicators of consumer spending – cash withdrawals and point-of-sale (POS) transactions have ticked up in Jun, ahead of the hike in VAT from July 1^st. Loans to the private sector is picking up, thanks to the various measures in place to support the economy as it tackles the Covid19 outbreak. Initiatives like the provision of concessional financing for SMEs and loan guarantee programme likely supported the faster pace of growth. The Corporate Sustainability Programme launched by the Ministry of Finance mid-Jul to support the private sector will also provide support going forward. The final chart tracks new letters of credit opened, by sector – an insight into trade finance. A letter of credit is a financial instrument, usually issued by a bank, which guarantees the seller will receive payment for goods sold to a foreign customer. The Covid19 outbreak put the brakes on activity from Apr-May. Recovery is visible in June’s data, but the difference is stark: LoCs opened for foodstuffs has been rising faster than say motor vehicles (accounted for 25.6% of total in Jan 2020 vs 7.2% in Jun). It is time to switch trade finance to blockchain technology – which will make trade faster, safer, and simpler (elimination of paperwork and associated costs, increased transparency and prevention of fraud)!

5. FDI flows in the Arab region

In Q1 2020, the number of new FDI projects in the Arab region contracted by 30% yoy to 185 projects in Q1 2020, with investments down by 27.3% to USD 11.2bn while job creation slipped by 23% to 21.3k, according to the Arab Investment & Export Credit Guarantee Corporation (Dhaman). GCC’s share of investments in the Arab region show that Saudi Arabia and UAE together account for 86.6% of the total in Q1 this year. FDI flows are likely to slow in the region this year, mirroring global trends: UNCTAD estimates global FDI inflows to decline by USD 1.1trn this year. The slowdown of implementation of ongoing projects will hurt prospects in the region as well as potential shelving of projects in the near- to medium-term – underscoring the need to diversify sectors into which FDI flows (oil and gas & real estate).
Egypt, UAE and Saudi Arabia together accounted for two-thirds of the FDI inflows into the Arab region during the period 2015-2019 though in terms of number of projects, UAE topped the list (41.4% of the total). The top two sectors attracting investments – coal, oil and gas and real estate – together account for almost half of the total investments (from just 7% of total number of projects). The largest number of FDI projects recorded during 2015-19 were in business services (13%) and financial services (11%) – but its share of investments was only 2% each.

 
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This article appeared in the print edition of Gulf Business, August 2020, which can be accessed online.

Flying together: Are mergers the way ahead for the GCC’s airline industry post pandemic?
Cost cutting measures by airlines will not suffice to stem the hemorrhage
Covid-19 has devastated the global aviation industry along with the tourism and hospitality industry. Even though domestic travel resumed in many nations (in Saudi Arabia, US and China among others) and flying restrictions eased (e.g. intra-Europe flights, UAE’s Etihad and Emirates are each flying to over 50 destinations), 42 per cent of all global commercial airlines fleet are still grounded, according to research by Cirium [at the time of going to press]. It is little wonder that the International Air Transport Association (IATA) forecast a 55 per cent decline in traffic levels this year. According to IATA, airline passenger revenues are expected to drop to $241bn in 2020, a 50 per cent decline compared to 2019. This is likely to be an underestimate. Covid-19 has generated the deepest recession in advanced economies since the great depression. Its deadly waves are still unfolding in Africa and Latin America, destroying demand for travel, with a second wave likely, according to epidemiologists.

Markets have reacted accordingly, with the Refinitiv global airlines price return index down by almost half (as of July 13). By end-June, Zoom’s market capitalisation of $72.44bn was worth more than the combined $62bn value of AA, Southwest, Delta, United, IAG (BA), Air France-KLM and Lufthansa. In May, Singapore Airlines reported its first loss in its 48-year history, while many airlines are under severe financial stress or have filed for bankruptcy (Latam, Avianca, South African and others), Chapter 11 protection, or are being restructured (Thai). The US provided a massive $58bn to rescue its airline industry.

To survive the post-Covid-19 world, the aviation sector – including airlines, airports and aircraft manufacturers – will have to be restructured. Despite chatter about “travel bubbles” and “immunity passports”, experts question whether recovered patients are fully immune. About 33 per cent of respondents to an IATA survey (conducted in the first week of June 2020) suggested that they would avoid travel in future as a continued measure to reduce the risk of catching the virus. For now, one of the major deterrents to travel is the quarantine period: only 17 per cent of the survey respondents were willing to stay in quarantine. If no vaccine is discovered, people will refrain from travelling abroad, with local destinations and road trips preferred. Social distancing will become the norm on flights, reducing available seat capacity by 33-50 per cent, reducing passenger load factors and raising questions about economic efficiency and financial viability.

The triple whammy of lockdowns, low oil prices and financial market turbulence has dealt a severe blow to the Middle East. The lockdown has directly impacted the UAE’s trade, tourism, transport and logistics sectors, which lie at the core of its diversification strategy and its role as a global business hub. Similarly, Saudi Arabia may need to review its development plans that include tourism as a key diversification option. The travel and tourism sectors have been critical to the GCC with the sector contributing $245bn to GDP (roughly 8.6 per cent) in 2019, while supporting nearly seven million jobs, according to the World Travel and Tourism Council. With more than half of the total GCC population consisting of internationally networked and mobile expatriates, the spillover and multiplier effects to the overall economy from the post-Covid-19 world requires structural adjustment and revision of diversification policies.

The GCC countries – with five airlines each in Saudi Arabia and the UAE, alongside Oman and Kuwait with two airlines each – have rapidly expanded their international networks in recent years. With small domestic markets and populations, the strategy has ended up subsidising foreign travellers. As international and regional travel remains highly restricted, the airlines’ revenue streams have all but evaporated. According to the latest estimates from IATA, wider Middle East and North Africa (MENA) traffic is estimated to fall by 56.1 per cent year-on-year in 2020, resulting in a $37bn loss in net post-tax profit. This will risk over 1.2 million jobs (half of the region’s 2.4 million aviation-related employment) and cause a $66bn shortfall in contribution to the region’s GDP. Saudi Arabia, Qatar and the UAE are the most exposed.

How should GCC airlines adjust to the massive loss of revenue? Like other airlines globally, Emirates, which expects at least 18-months for a recovery of travel, has grounded much of its fleet, placed employees on unpaid leave, cut the salaries of its workforce by up to a half, and initiated job cuts to reduce its operating costs of some $23bn. The CEO of Qatar Airways disclosed an estimated 55 per cent drop in revenues from last year, and stated that about 20 per cent of its workforce would be cut.  Job losses in Saudia are also estimated to be very steep, with the Saudi government providing support by suspending airport slot use rules for the summer season and extending licences and certifications for crew, trainers and examiners. However, the cost cutting measures by the airlines will not be sufficient to stem the hemorrhage.

The majority of GCC airlines are fully government owned. How can they support their airlines? Should the governments consider a bailout? Already, in a bid to tackle the crisis, large stimulus packages amounting to some 18 per cent of GDP are being rolled out across the GCC, including a combination of fiscal measures along with central banks’ monetary and credit packages. But with oil revenues accounting for more than 55 per cent of total government revenues in the UAE and over 70 per cent in Saudi Arabia and Bahrain – according to the IMF – the drop in crude prices is being felt strongly. And with the decline in other revenues (including VAT, taxes and fees), a bailout for the airlines – while supportive of the sector – would imply a massive increase in budget deficits. The GCC cannot afford a bailout of their airlines, given the impact of Covid-19 and oil prices on budgets, with the IMF forecasting 2020 average deficits of 10.5 per cent for the region.

The case for mergers
The alternative and better policy for adjustment is through a combination of consolidation, downsizing and mergers. The UAE, Saudi and other countries should consider merging their airlines, which would achieve large cost savings and optimise revenue streams. Given that the governments fully-own or control the airlines, mergers and consolidation allows for a smoother and less costly adjustment process: no anti-trust considerations, labour disputes or having to realign cultural differences.

The economic rationale behind mergers is multi-faceted: it allows for (a) economies of scale: given that the airlines’ functions and operations (including back office functions, maintenance and support services etc) are largely identical, as are their Airbus and Boeing fleets; (b) cost reductions from the rationalisation of networks – Etihad and Emirates fly to more than 100 destinations in common, leading to cannibalisation and costly competition. A merger would reduce redundant flights and increase passenger load factors while optimising route planning and reducing competition for other passenger and cargo services; (c) more effective and intensive utilisation of existing fleets and airports; (d) scaling down to increase productivity; (e) phasing out airport expansion plans by avoiding duplication of services.

The bottom line is that a restructuring and merger of the flagship carriers within the GCC nations and their low-cost airlines would achieve substantial overall cost savings, strengthen the combined groups, make the merged airlines regionally and internationally more competitive and avoid duplication of costly bailouts at a time when the region lacks the fiscal space.

The aviation industry, with its massive investments in airports, airlines, transport and logistics, has been at the core of the efforts of the GCC countries to diversify their economies through tourism, hospitality, trade and infrastructure services. Covid-19, low oil prices and the global recession are threatening the viability of these diversification strategies. Structural reforms (such as airline mergers and consolidation) and economic policy readjustment will be required for a sustainable post-coronavirus future. The current crisis poses an unprecedented opportunity for consolidation and rationalising of government spending, while also reviewing the structure of state-owned enterprises and government-related entities.

Dr. Nasser Saidi participated as a panelist in the webinar organised by the Emirates Environmental Group (EEG) on 28^th of July – under the theme “Tackling the Climate Emergency with Climate Finance”. The panel discussion focused on the urgent need for increasing government and private spending on crucial sectors such as health, education, infrastructure, and climate change as well as open up a dialogue about the financial opportunities in the UAE that can be diverted towards combating climate change.
The panel discussion can be viewed below:

Charts of the Week
1. Spread of Covid19 in the GCC
Most GCC nations have begun a phased re-opening of their economies after being in partial/ complete lockdown for weeks. Some restrictions still remain (e.g. partial capacity at mosques, restaurants, movie theatres, gyms etc.) in countries that have reopened (like the UAE); where cases are high, partial nighttime curfews and targeted lockdowns are in place. The spread of the outbreak is varied among the GCC nations.
The chart maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases. Among the GCC nations, the UAE seems to be performing better – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people.

Saudi Arabia, which accounts for the lion’s share in GCC’s GDP, also has the highest 7-day average of daily increase in Covid19 cases (size of the bubble). This implies a sharper downturn in GDP this year due to the outbreak, but the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. It is then little wonder that the rhetoric has shifted to diversifying revenue base with more privatisations and a hint of the introduction of an income tax in the future.
The GCC nations with the highest share in total daily increase in count (the highest being Oman) are among those with a lower share of overall GDP. For these nations, the worries are multiplied manyfold: not only will growth be affected by both the outbreak and lower oil prices, fiscal constraints and lower credit ratings will restrain their access to borrow from international capital markets. While governments have tightened purse strings, reducing capital and infrastructure spending will be detrimental to economic growth (especially the private sector).
A decline in growth in oil-exporters also has a negative impact on many oil-importing nations: ranging from job losses (& the return of these residents to home countries that already face relatively higher unemployment rates), lower remittances as well as lower foreign aid and investments.
Chart 2. Economic Impact of Covid19 and low oil prices on the Middle East’s oil exporters & importers

 
2. Decline in global trade
Along with tourism, global trade has been one of the most-hit by the global Covid19 outbreak. Trade growth had been slowing for the past year, and the pandemic has only accelerated its pace. Monthly data from the IMF’s Direction of Trade Statistics reveal that the drop in export growth touched two-digits in Mar, and given lockdown measures and factory shutdowns it can be estimated that data for Apr-May will be far worse.

The WTO estimates that trade will drop by 18.5% in Q2 this year, with a full year dip of between 13% (optimistic) to 32% (pessimistic scenario). For the Middle East, the 13.9% decline in total exports in Mar is a result of both lower oil production and lower demand for oil.
Shipping estimates, denoted by the Baltic Exchange’s sea freight index, touched a 9-month high in early Jul after recovering in Jun: this should translate into an improvement in global trade after May. Air cargo traffic data from IATA also denote that the cargo levels have shown a slight rebound in Apr (the latest available data). However, note that in both cases, there is a long way to recover to their pre-Covid19 levels. Supply chains remain disrupted though there has been a rebound in manufacturing activity across the globe (latest PMI numbers from Europe and Asia).

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UAE, Covid19 & economic activity after re-opening post-lockdown
With UAE easing restrictions imposed due to the Covid19 outbreak and opening the economy in phases, a pickup in economic activity is inevitable. The Oxford Government Stringency Index (which records the number and strictness of government policies) scores the UAE at 69.44 in the beginning of Jul, down from a high of 89.81 recorded during the first two weeks of Apr (a higher score indicates a stricter government response). The question however remains whether residents have embraced the “re-opening” and gone back to “business as usual”.
Few economic indicators are released monthly in the UAE and hence the availability of Google and Apple Mobility numbers offer a good perspective of where the economy is headed to, reopening after the lockdown. Google Mobility indicators show trends over several weeks on how visits to various sectors – retail & recreation, grocery and pharmacy, parks, transit stations, workplaces – compare to a baseline value for that day of the week [1] while residential shows a change in duration of time spent at home. Apple Mobility indicators track resident activity – walking and driving – which can also be read into as “confidence” indicators i.e. you are more likely to be out exercising if you have accepted the new Covid19 realities (social distancing, wearing masks etc).
These high-frequency indicators offer an insight into retail behaviour (visit to recreation, retail outlets, groceries), as well as economic activity (transit stations, workplaces and residential) while parks and walking can be interpreted as “social well-being”, an equally important measure.

The lockdown phase in the UAE (towards the end of March) is evident from Chart 1, with the various indicators dipping to near -100%. Of the indicators, the two that are inching back to baseline are visits to groceries and pharmacies as well as workplaces. During the peak of the outbreak, when severe restrictions were in place, there was a surge e-commerce activity (especially online shopping platforms) which still continues, and could explain the current gap to baseline activity.
Workplaces are still 24% below the baseline, implying that working from home is still an option being provided by many offices. If companies continue to offer flexible work options, this would reduce office space and rents, while employees can stay at cheaper home locations, save on rents, and telecommute. Congestion statistics already show a return to normal, more so in Dubai than Abu Dhabi (Chart 2). However, to fully realise the benefits of telecommuting, it requires removing barriers by amending labour laws (e.g. part-time work/ freelancing options versus being tied to a specific company) and liberalising VoIP services (for businesses, especially for SMEs).

The uptick in “workplaces” has not been mirrored in “transit stations”. This is likely the result of a combination of two factors: (a) prevalence of using cars to travel – a report in Dec 2018 disclosed that UAE had an average ratio of one car to every three residents; average congestion is picking up faster in Dubai than in Abu Dhabi; (b) public transport is more frequently used by those without the option of personal transport, and who are more likely working in the services sector (e.g. in retail, hospitality sector and the like). Working in the hardest hit sectors during the Covid19 outbreak, these persons could have witnessed job losses or reduced working hours resulting in a slower uptick in “transit stations” category.
In spite of retail and recreation outlets operating at full capacity now, the return to baseline hasn’t been as smooth. One of the reasons could be the launch of online shopping by many retailers; another restriction is related to F&B operations: social distancing rules mean curtailed capacity, implying it will take longer for the sector to recover. Even during the Eid holidays in end-May, the uptick in this category was muted though lifting of restrictions mid-Jun on entry of kids and persons aged 60+ seems to have had a positive impact. With tourists back in Dubai starting Jul 7, the picture could change in the retailers’ favour.

Last, but not the least, the UAE central bank has released monthly statistics for May – the 2nd month after lockdown was initiated towards end-Mar. The Central Bank had launched a AED 256bn Targeted Economic Support Scheme for banks to provide temporary financial relief for individuals, SMEs and other private businesses affected by the pandemic, following which banks offered relief for customers’ loans. Alongside, support was specifically initiated for SMEs – be it to open new bank accounts faster to providing credit guarantees. However, this does not seem to be reflected in the gross credit disbursed to UAE firms (Chart 3). Loans to the government rose by 3.06% mom in May while loans to the retail sector declined in month on month terms (-0.6%).  Public sector entities (i.e. state-owned enterprises/ GREs) saw two consecutive 8%+ mom increase in loans before dropping by -0.7% mom in May.
So, what does all this mean from a policy perspective? The UAE’s drive to greater digitalization will gain traction in the new Covid19 normal: from varied e-commerce offerings to creating innovative payment systems to neo-banking options (ADGM announced associated regulations last year). A future UAE where work from home is commonplace, delinking jobs and visas are norm, and online payments are king (vs cash currently) is not far-fetched any more. The role of the private sector (including investments) is critical in achieving this goal alongside government support, and to this extend might need specific support for the SME sector which is oft sidelined given relatively lower turnover, lack of security/ collateral as well as potential for non-performing loans (and “absconding” owners).
[1] The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020. 

This article titled “How GCC countries can adapt policies for a post Covid-19 world” appeared in The National on 23rd June, 2020. The original article can be accessed here.

 

How GCC countries can adapt policies for a post Covid-19 world

by Dr. Nasser Saidi and Aathira Prasad

As countries emerge from three-months of Covid-19 containment, policy makers need to plan for a transformed post-pandemic world and create a new development model

Covid19 continues to be part of life as we know it. The GCC nations are gradually emerging from lockdown. There are nodes of optimism as the number of recoveries outpace the confirmed cases, including in the UAE.
Stimulus packages across the GCC included a number of common policy actions – rate cuts, liquidity enhancing measures, deferment of loans and credit card payments. Also noteworthy is the support extended to small and medium sizes enterprises (SMEs) and affected sectors impacted by the pandemic-induced lockdowns which include tourism, hospitality and aviation.
After almost 3 months of lockdowns, countries are phasing their recovery plans. As we gradually emerge from Covid-19 containment, policy makers need to plan for a transformed post-pandemic world, which underscores the need to create a new development model.
For the GCC countries, this means reviewing three broad policy measures related to monetary and fiscal policies as well as structural reforms.
Most GCC nations are pegged to the dollar except for Kuwait which pegs its dinar to a basket including the greenback. Hence, the countries follow the Fed’s interest rate moves, which may limit the use of other instruments of monetary policy and might restrict other policy moves from the central banks other than stimulus packages to increase liquidity.
So what can the central banks do to support their economies, while maintaining a peg or moving to a currency basket? Two innovative ways of providing support would be the establishment of GCC central bank swap lines and monetising new government debt issued for deficit financing.
The establishment of GCC central bank swap lines, with an option for the larger central banks (SAMA, UAE) to tap the Fed or People’s Bank of China (PBoC) would enable regional central banks to tap additional liquidity during times of market stress, support financial stability and provide a liquidity backstop.
Monetising new government debt issued for deficit financing can help avoid the crowding out of the private sector and inject liquidity, given the lack of developed local currency debt markets and central banks’ limited ability to conduct open market operations.
On the fiscal policy front as part of their pivot towards diversifying their economies and becoming less reliant on oil revenues, a move towards deficit financing along with the institution of fiscal rules for long-term fiscal sustainability can help accelerate the development of local currency debt and mortgage markets to finance housing and long-term infrastructure projects.
Rationalising government spending either by reducing the size of government, shifting activities to the private sector, and moving to targeted subsidies is another element of fiscal reform. In conjunction governments can issue long term debt that can be bought by central banks during a crisis period which is happening in the US and Europe today.
Diversify government revenues by improving the management of public commercial assets and increasing the efficiency of tax collection is an important element of fiscal reform. Consolidating the large number of fees and charges on consumers and businesses into fewer broad-based taxes, can help lower business and living costs.
The Covid pandemic is also an incentive for “Green New Deals” through investment in public health, domestic AgriTech for food security, renewable energy, clean cities and technologies, that will support job creation and economic diversification. Governments can take the first step to ensure a project pipeline, focusing on public-private partnerships, with targeted incentives for SME participation.
Accelerating the digitisation drive will also lower the cost of broadband internet and accessibility while speeding up the implementation of 5G.
The establishment of social safety nets and protection programs and pension schemes will also help reduce financial burdens that can come around in periods of crisis. For employees, a contribution towards a pension fund would ensure sufficient savings in the event of job losses or retirement and for employers, this provides them with an investment fund and support end-of-service or gratuity payments.
Structural reforms including the acceleration of privatisation, working closer with private sector participation is key. Developing insolvency frameworks to support out-of-court settlement, corporate restructuring and adequately protect creditors’ rights is another important element. Enhancing the environment that continues to attract and retain human capital through a permanent residency programme could help generate significant economic gains.
A positive side-effect of Covid-19 is the realisation that working from home is a feasible option. Companies can offer flexible work options, reduce office space and rents, while employees can stay at cheaper home locations, save on rents, and telecommute. To realise these benefits, requires removing barriers by amending labour laws and liberalising voice over Internet Protocol (VoIP).
The Covid-19 perfect storm is an unprecedented opportunity for the GCC countries for a policy reset, to steer toward a new development model for a post-pandemic world and move away from business as usual.
 

Dr. Nasser Saidi commented on the currency fluctuations and associated protests in Lebanon in the FT article titled “Currency collapse fuels mass protests in Lebanon” published on 12th June 2020.
The full article can be accessed at: https://www.ft.com/content/a1c5f2aa-79a6-48ec-aa8e-6b5d60bda1f7
 
The comment is posted below:
Nasser Saidi, a former central bank vice-governor, said there was little the government could do at this point to stop the slide. “This is a cash market, not your usual forex market. The central bank is no longer able to intervene.”
Mr Saidi, the former central banker, said the volatile price swings were driven by four main factors: uncertainty among currency traders about government policy; the printing of currency to cover a fiscal deficit left by falling tax receipts; the economic impact of coronavirus; and panic in the exchange market in neighbouring Syria, where business people are anticipating the impact of new US sanctions next week.
 

Dr. Nasser Saidi was interviewed on CNBC’s “Capital Connection” by Hadley Gamble on the country’s negotiations with the IMF and the reforms required to rescue the economy.
Some comments highlighted below:

Watch the CNBC interview here: https://twitter.com/i/status/1268086096392527874

Dr. Nasser Saidi’s comments on Saudi Arabia’s austerity drive & tripling of VAT were part of the Reuters article titled “Promise of future prosperity fades as austerity hits Saudis’ pockets”, which was published on 12th May 2020.
Comments are posted below.
Dubai-based economist Nasser Saidi said any additional revenues from the VAT hike would be negligible and the move will likely sharpen the recession. “It would add an unnecessary shock to the system at a time when businesses are struggling to stay afloat, households are experiencing lower incomes and expatriates without jobs are returning home,” he said.
 

Dr. Nasser Saidi’s presentation titled “The Economic Consequences of COVID-19 & Impact on Clean Energy” was part of the Clean Energy Business Council’s webinar titled “A Pandemic, Oil Price Collapse, A Recession: Is the Future still Green?” held on May 6th 2020.
A summary of the webinar is available on the CEBC website (https://cebcmena.com/knowledge-centre/reports-and-publications/) and can be downloaded directly here.
Watch the webinar below:

Dr. Nasser Saidi participated as a panelist at the IMF’s launch of the Regional Economic Outlook report for the Middle East and North Africa region on 27th April, 2020.
The panel discussion covered the macro outlook for the region given the inter-twined effects of Covid19, fall in oil prices and financial shocks.
The IMF report can be accessed at https://www.imf.org/en/Publications/REO/MECA/Issues/2020/04/15/regional-economic-outlook-middle-east-central-asia-report
Watch the video of the webinar below (link to the IMF: https://www.imf.org/external/mmedia/view.aspx?vid=6152433693001)


In the April 26th, 2020 edition of Bloomberg Daybreak: Middle East, Dr. Nasser Saidi spoke to Yousef Gamal el-din and Manus Cranny on the impact of Covid19 on economic growth (what shaped recovery?), the changing global narrative and Central Bank responses.

Watch the interview below.

The original link to the full episode (from 03:30 onwards): https://www.bloomberg.com/news/videos/2020-04-26/-bloomberg-daybreak-middle-east-full-show-04-26-2020-video



Dr. Nasser Saidi was invited to speak about the impact of Covid19 on the global and regional economy on 16th Apr 2020, as part of The Athenaeum Dialogue (a closed group of members).
As part of the presentation titled “Pandemonics 2020“, Dr. Saidi explored past pandemics’ facts, the current status of covid19, its economic effects as well as the priorities and policy responses required to move forward. Ending the presentation with a question whether a new post-Covid normal would emerge, Dr. Saidi also explored plans for the recovery phase.

Dr. Nasser Saidi’s op-ed titled “COVID-19: Good can also come out of a global scourge” was published in Gulf News on 16th April 2020, and is posted below.
Link to the original article is here. An edited version was also published in Al Khaleej Today.

COVID-19: Good can also come out of a global scourge

If we take in right lessons from COVID-19, everyone can benefit from its outcomes

Reflective of Lebanon’s shortage of foreign capital, the Lebanese government recently announced it will stop payment on all future maturing eurobonds. In parallel, government and financial circles have increasingly discussed the potential need for a package by the International Monetary Fund (IMF) to supply the majority of the needed capital. In this roundtable, co-produced by the Lebanese Center for Policy Studies (LCPS) and Jadaliyya, Dr. Nasser Saidi & two other analysts share their views of the amount of capital needed, the potential implications of IMF involvement, and what might need to be different this time around vis-à-vis international borrowing. Dr. Nasser Saidi’s comments are pasted below.
 
The complete article can be accessed here:
LCPS and Jadaliyya (LCPS&J): How much foreign capital does Lebanon need and for what purpose? 
Nasser Saidi: The amount of foreign financing needs to be viewed within a comprehensive, multi-year adjustment and reform program that tackles macroeconomic, fiscal, banking, financial, monetary, and currency sectors of the economy. There are four components to such a program: Macroeconomic and structural reform; banking sector restructuring; public debt restructuring (including central bank debt); and social welfare.
According to government estimates (revealed at a recent presentation to investors) public debt was 178% of GDP at end-2019. The cost of servicing the debt would be just over $10 billion, which is equivalent to approximately 22% of GDP and more than 65% of government revenue. This was an unsustainable position even before the country fell prey to the COVID-19 outbreak. Separately, the central bank (BdL) owes $120 billion to the local banks. BdL foreign exchange holdings have come under high pressure, dropping to about $29 billion in January 2020, of which 22 billion are liquid (18 billion of which is BdL-held mandatory banking sector reserves). It is evident that the banking system needs a comprehensive restructuring.
Given public debt and fiscal unsustainability, the prices of sovereign debt have plummeted by an average of about 50% since the end of 2019. With about 70% of total bank assets invested in sovereign and BdL debt, the write down of debt means that banks’ equity has been wiped out. Bank recapitalization and restructuring will require some $25-$30 billion, of which I estimate some 10 billion would be foreign financing. In addition, a foreign aid package of $25-$30 billion will be needed for macroeconomic and fiscal reform, structural adjustment, central bank restructuring, and balance of payments support, along with the establishment of necessary social safety nets.
This will necessitate an IMF program and multilateral financing. For it, there should be a completely redesigned CEDRE II program. I call it a “Lebanon Stabilization and Liquidity” fund. It is important to note that the overall cost of adjustment and required financing is rising due to unwarranted delay in approaching the IMF for assistance and designing the financing.
Furthermore, the ongoing COVID-19 outbreak is adding more fuel to the fire: We can expect a GDP contraction of 20%, following a 7% dip last year. The government has promised financial aid of 400,000 Lebanese liras (approximately $140, at the parallel market rate of 2,900 liras/dollar) to the most vulnerable families (roughly estimated at 185,000 families combining those registered with the National Poverty Targeting Program, those drivers forced off the job by the lockdown, and frontline healthcare workers). But that will not be sufficient. The sharp drop in economic activity has led to growing layoffs and unemployment, business closures and bankruptcies, and overall falling incomes—all pushing more people into poverty. Social and economic conditions are rapidly deteriorating: Almost half of the population now lives below the poverty line; non-performing loans are likely to increase and many banks could become insolvent; the value of the Lebanese lira is now some 40-50% less on parallel markets fueling inflation; and Human Rights Watch finds evidence of discretionary measures against refugees. The recipe for political and social unrest is boiling.
 
LCPS&J: What are some of the political and economic implications of securing such capital from the IMF? Could you identify other possible streams of foreign capital that could substitute for an IMF bailout program?
Nasser Saidi: The political and economic implications of an IMF program are all positive, as this would include the development and implementation of a social safety net to shield the more vulnerable segments of the population. IMF program conditionality will force an irresponsible and corrupt political class and its subservient policymakers—who are responsible for Lebanon’s catastrophic demise—to undertake needed reforms (e.g., electricity, fiscal, monetary, and exchange sectors) that should have been undertaken years ago. The policy conditionality would be based on the national program the government should prepare beforehand. An IMF program will add credibility to the reforms included in the proposed Lebanon Stabilization and Liquidity fund.
It is bitter medicine, but the alternative would be lost decades, growing misery and poverty, and the destruction of Lebanon’s economic base. The IMF itself would only be providing part of the funding (some $4-$5 billion) with the balance coming from other international financial institutions (IFIs), the European Bank for Reconstruction and Development, and the European Investment Bank, and CEDRE participants, including the EU, the Gulf Cooperation Council (GCC) countries, Japan, and China. It is important to note that non-IMF funding will only be available if there is an agreed IMF program. None of the countries and IFIs, including the GCC and EU will provide aid and funding without it. The same is true for private sector investment and finance (e.g., for public-private partnerships), restoration of Lebanon’s access to capital market, or for a sustainable restructuring of Lebanon’s debt. There are no substitutes to an IMF bail-out program and conditionality. Lebanon desperately needs external funding. It cannot rely on purely domestic funding for the restructuring of its public debt and its banking sector (including BdL), investing in infrastructure, reforming public finances and rekindling and supporting the private sector, as well as provide balance of payments support.
 
LCPS&J: Given the Lebanese government’s poor track record in effectively managing foreign aid, what measures should it take to ensure that such funds are put to meaningful financial recovery?
Nasser Saidi: The government must introduce an anti-corruption and stolen asset recovery program. Transparency International ranks Lebanon 43rd-most corrupt out of total of 180 countries. Protestors have, justifiably, focused on rampant high-level corruption, bribery, and rife nepotism.
The current government must prioritize combating corruption at all levels. This should include: (1) Appointing and empowering a special anti-corruption prosecutor and unit; (2) implementing an anti-corruption program with respect to taxation and revenue collection; (3) reforming government procurement law and procedures; (d) establishing strong and independent regulators in sectors such as banking, financial, telecoms, oil and gas, electricity, among others. And the posts should be filled making sure that the process is completely transparent and that appointees are shielded from political and sectarian influence.
Last, but not least, the state must recover assets that politicians, policymakers, and their associates illicitly and criminally appropriated. Recovering stolen assets can be a wealth-regenerating strategy if implemented properly with complete transparency. Lebanon should immediately participate in The Stolen Asset Recovery Initiative (StAR), a partnership between the World Bank Group and the United Nations Office on Drugs and Crime (UNODC). StAR works with “developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets.”

Dr. Nasser Saidi spoke to Al Arabiya’s Lara Habib on 15th Apr 2020 about the G20’s agreement to provide temporary debt relief to poorer nations. The full interview can be viewed here.
Dr. Saidi said: “I believe this is too little. We need at least 1-year debt moratorium to free up $1 trillion. IMF estimates EMEs funding needs are $2.5 trillion.”

Titled “Low Oil Prices, Coronavirus, and the Future of Gulf Economies”, this panel discussion was held by the Arab Gulf States Institute in Washington (AGSIW) as a webinar on 7th April 2020.
Gulf Arab states have announced $97 billion in emergency stimulus packages and other support measures to help offset the economic impact of the coronavirus outbreak. Spending needs are likely to increase over the short term, and regional governments must simultaneously manage the fiscal repercussions of oil prices sliding below $30 per barrel. Saudi Arabia and Oman announced budget cuts across various government ministries as states across the Gulf explore opportunities to rein in spending.

How will the spending needs and constraints stemming from the coronavirus and low oil prices affect the fiscal health of Gulf Arab states? What policy options do these states have at their disposal to confront these interrelated crises? What are the longer-term implications for economic diversification efforts across the Gulf region?

 
Watch the discussion below:

Dr. Nasser Saidi’s CNBC Arabia interview focused on the role of central banks in the ongoing Covid19 pandemic, growing levels of debt, limits to role of monetary policy as well as Universal Basic Income. This interview was aired on 6th April 2020.

Will the GCC nations require a second round of stimulus packages, asked Zeina Soufan from Dubai TV to Dr. Nasser Saidi on the show which was broadcast on 3rd Apr 2020. The interview can be viewed here.

In the March 29th, 2020 edition of Bloomberg Daybreak: Middle East, Dr. Nasser Saidi speaks to Yousef Gamal el-din and Manus Cranny on why Covid19 will rampage through the US, deep recession ahead, weak US dollar, vulnerability of some emerging markets with high debt and Central Bank responses.
Comments from the interview were published in LA Times
“Emerging-market currencies, particularly those with high levels of debt and very low growth prospects, like South Africa, will be pressured, but also other countries like Taiwan and others that have seen large outflows. All of those currencies are going to be exposed, the Aussie dollar as well.”

Watch the interview below.

The original link to the full episode (Dr. Nasser Saidi joins from 03:06): https://www.bloomberg.com/news/videos/2020-03-29/-bloomberg-daybreak-middle-east-full-show-03-29-2020-video



Dr. Nasser Saidi’s comments appeared an article titled “UAE seen as GCC nation best able to weather oil crash, coronavirus” that appeared in S&P Global Platts on 26th Mar 2020.
Comments from the article are posted below. The full article can be accessed here.
With all GCC countries set to post fiscal deficits, they may have few options in plugging the shortfall.
“Given the ongoing financial crisis, the debt overhang of around $500bn in the GCC will make it increasingly difficult for sovereigns and corporates to finance their deficits through borrowing as access to banking and financial markets will become more difficult and expensive,” Nasser Saidi, president of Dubai-based consultancy Nasser Saidi & Associates, said.
 

Dr. Nasser Saidi’s comments appeared an article titled “Surviving the Covid-19 economic crisis” that appeared in MEED on 24th Mar 2020.
Comments from the article are posted below. The full article can be accessed here.
“It looks like the oil price war that is now launched is a strategic move by Saudi Arabia to weaken or destroy shale oil,” says economist Nasser Saidi, founder and president of Nasser Saidi & Associates.
“It was bound to happen. There are two factors negatively effecting oil – renewables and shale. Shale was eating into the Opec plus share. They either wait and continue to lose market share or they act. They could choose now or later. They chose now.”
“I estimate that because of the losses, the GCC needs to raise $160bn-180bn in 2020 to maintain current spending deficits and provide financial support to some industries such as aviation,” says Saidi.
No significant announcements have been made about projects being delayed or cancelled in the region, but the projects sector will be significantly affected by cuts to capital spending. “The likelihood is that many will be delayed or postponed,” says Saidi. “And the net result is that structural adjustment, in terms of diversification, will be more difficult unless they bite the bullet and open up privatisation and public-private partnerships (PPPs). To me, this is the time to provide incentives.”

The article titled “The Arab World’s Perfect COVID-19 Storm”, was first published on Project Syndicate on 24 March 2020, and can be directly accessed here.

As the GCC nations roll out various economic, financial, health and travel-related initiatives, the latest country-by-country measures is compiled below. Scroll down to see a map of the confirmed Covid-19 cases in the Middle East & North Africa region.
The list is update as of 3:00pm on 21st June, 2020.
 
Table: GCC responses to tackle the Covid19 outbreak

Map: Number of Confirmed Covid19 cases by country (Source: Johns Hopkins University)
google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Bahrain', 21331], ['Kuwait', 39145], ['Oman', 29471], ['Qatar', 86488], ['Saudi Arabia', 154233], ['Lebanon', 1536], ['Iraq', 29222], ['Jordan', 1015], ['United Arab Emirates', 44533], ['Syria', 204], ['Iran', 202584], ['West Bank & Gaza', 448] ]); var options = { region: '145', // Middle East colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div')); chart.draw(data, options); } google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Algeria', 11631], ['Morocco', 9957], ['Tunisia', 1156], ['Djibouti', 4565], ['Libya', 544], ['Sudan', 7007], ['South Sudan', 1882], ['Iran', 202584], ['Egypt', 53758], ['Syria', 204], ['Yemen', 922] ]); var options = { region: '015', // North Africa colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div2')); chart.draw(data, options); } google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Iran', 202584], ['Syria', 204], ['Afghanistan', 28833] ]); var options = { region: '034', // SAsia colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div3')); chart.draw(data, options); }
Middle East

North Africa

Iran & Afghanistan

Dr. Nasser Saidi discusses the GCC’s responses to the ongoing Covid19 outbreak, in an interview that aired on Al Arabiya on 17th March 2020. In the interview, he reiterates the need for fiscal policy stimulus (given its effectiveness) vs monetary policy action; also highlights the sectors and countries that would be most adversely affected.
The video can be viewed below; the write-up can be accessed at https://ara.tv/4rmup

 

Dr. Nasser Saidi’s comments appeared an article titled “The Middle East is already wracked by war. Now it must confront the coronavirus, too” that appeared in the Washington Post on 16th Mar 2020.
Comments from the article are posted below. The full article can be accessed here.
Oil producers in the Persian Gulf countries will be forced to cut back spending, and countries elsewhere that depend on remittances from expatriates in the gulf region will also suffer, said Nasser Saidi, a Dubai-based economist and former Lebanese finance minister.
Lebanon is in the throes of a financial crisis that has seen its currency collapse amid widespread street protests. Iraq, which depends on oil for almost all its income, will be badly hit at a time when political protests there have rocked the country.
The region will almost certainly slide into recession, Saidi said.
“It means unemployment will get worse. It means socioeconomic conditions will deteriorate. There will be more distress, more social problems and more political protests,” he said. “It’s not a pretty picture for the Middle East.”

In the March 10th, 2020 edition of Bloomberg Daybreak: Europe, Dr. Nasser Saidi speaks to Manus Cranny on discusses how the coronavirus outbreak is affecting the global economy, policies and markets.

Watch a section of the interview below and full episode (further below).

The original link to the full episode (from 07:20 onwards): https://www.bloomberg.com/news/videos/2020-03-10/-bloomberg-daybreak-europe-full-show-03-10-2020-video

Dr. Nasser Saidi was interviewed on CNN’s Connect the World with Becky Anderson on the 9th of Mar 2020.
Watch the interview videos below:
Just how bad are things with Lebanon’s economy? What will a combination of COVID19 & the collapse in oil prices bring about in the MENA region? With global stocks falling fast, oil plummeting and COVID19 fears spreading, how should policymakers respond to the crises?