Gulf turns to pandemic playbook to head off another downturn

The GCC and some other Arab states are taking pre-emptive action to head off what is likely to prove a painful economic downturn.

We should remember how strongly many of these states, particularly the UAE, emerged from the Covid-19 pandemic less than five years ago. These are countries that have recent experience of coping with adversity.

The UAE central bank is following its pandemic playbook in temporarily loosening liquidity rules and expanding access to funding for banks.

As part of a five-pillared approach, the central bank will allow banks to postpone classification of loans to individuals and companies, specifically those affected by “extraordinary circumstances”. This is code for not declaring overdue loans as delinquent or non-performing.

The UAE, which adjusts prices every month to reflect global energy trends, has also hiked petrol prices by nearly a third – albeit motorists are still paying less than a dollar a litre.

Dubai, one of the seven emirates, is also offering its own support. It is giving incentives worth AED1 billion ($272 million) to ease pressure on businesses and individuals. These consist of a three-month deferral of various government fees.

We know Dubai’s restaurants and hotels are hurting badly. Whether a deferral of fees will be enough to forestall closures remains to be seen.

During Covid, Dubai introduced similar stimulus measures, forming part of a near-$2 billion package as part of a broader UAE response.

Then the measures included fee cuts to businesses, utility discounts, customs relief and support for tourism, alongside central bank-backed liquidity to facilitate loan deferrals. Watch this space.

In Kuwait, the central bank is also acting through the banking system. It is temporarily easing some macro-prudential ratios that banks usually have to meet, including reducing a minimum liquidity coverage ratio and net stable funding ratio. These mean the banks do not have to retain as much capital against lending.

In Qatar, the central bank has said domestic liquidity remains strong and capital buffers exceed regulatory requirements.

Away from the Gulf and in a symbolic move, Jordan has curtailed overseas travel by officials for two months. This seems unlikely to make a dent in the public finances.

Egypt has hiked fuel, metro and rail prices and told people not to stay out beyond 9pm in the week and 10pm at weekends. The government has told civil servants to work from home for a day a week.

A notable absentee is Bahrain, economically the most exposed of the GCC states. In December the kingdom approved an 11-part fiscal package including increases in electricity and water rates as well as fuel and natural gas prices for businesses, a new corporate tax and a 20 percent cut in administrative spending. But the kingdom has not acted since the start of the Iran war.

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The International Energy Agency has described the events of the past five weeks as the largest disruption to the global oil market in history.

There may be more to come. As we approach the sixth week of the conflict, we await a naval confrontation to clear the Strait of Hormuz. Which is to say that we could still be waiting for this at the end of April as Israel and the US degrade Iranian drone and missile power.

To its credit, the Institute of Chartered Accountants of England and Wales has made some macro projections, in partnership with Capital Economics. Having predicted strong growth this year, the two now see a small contraction in GCC economies in toto. They isolate travel and tourism, which have been emerging as pillars of non-oil economies, as being particularly badly affected, for longer.

However, they see energy production as easing some time between May and June. And so they expect a strong rebound in GCC economies next year to growth of 8.5 percent. Oman and Saudi Arabia are likely to see improved fiscal positions on the back of lower deficits. Qatar and Bahrain are most affected, although Qatar has a huge financial cushion.

The report’s authors see private foreign direct investment as being curtailed in the short term but argue that “the region’s structural investment case is strong enough to warrant a swift recovery”. Here’s hoping.