Posted on December 10, 2020

The latest edition of PwC’s Middle East Economy Watch highlights the economic recovery phase from the COVID-19 pandemic in the Middle East and provides an overview of expected long term challenges and their potential solutions.

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Economic activity picks up in Q3 as restrictions ease

Q2 2020 witnessed historically low oil prices and the most intense OPEC+ production cuts, exacerbated by the first wave of the COVID-19 pandemic in the Middle East. Economic activity however, picked up in Q3 with leading economic performance indicators showing signs of recovery. Purchase Managers Indices, which were in the contraction zone for the entire region in Q2, are showing expansion for most months since July. Another encouraging sign for the economy was mobility data from Q3 that uses mobile phone GPS location to show the frequency of visits to different locations including workplaces and shopping centres. By November, most countries were showing a marked recovery in mobility, although still about a 20%-25% below the baseline.

The PMI, mobility and point of sales data, along with more anecdotal accounts of activity, suggest that strong rebounds will show up in Q3 GDP data. Some sectors, like manufacturing and trade, will have likely recovered more strongly than tourism and aviation. Government stimulus spending, including support for private-sector salaries and tax deferrals, with Central banks in the GCC announcing rolling over stimulus packages to 2021 to support the economy.

Challenging outlook and rising debt level

The economic recovery from COVID-19 will be just as challenging as the health response, and even more drawn out, as it could take 2 years for the GCC economies to recover to pre-COVID levels. After a historic shock of oil demand in Q2 along with a y-o-y decline of 9% on average in 2020, forecasts predict a prolonged impact on oil demand. On the positive side, oil producers in the Middle East, and particularly in the GCC, have among the lowest dollar and carbon costs of production and so should be able to find a market even in a world of declining oil demand. It is even possible that prices might rise later in the decade if the current underinvestment in new capacity causes supply to decline even more quickly than demand.

One of the lasting impacts of the pandemic will be on the sovereign balance sheets. The IMF expects regional debt (excluding Lebanon, which went into default in April) to increase by 64% by 2025 to $1.5trn. The most dramatic increase will be in Kuwait, going from just 12% of GDP in 2019 to 91% in 2025. Qatar is one of the only countries in the Middle East that is expected to witness a decrease in the debt to GDP ratio from 2020 due to rising prices of natural gas and prudent fiscal measures.

Bassam Hajhamad (pictured), PwC Qatar Country Senior Partner said: "Despite the uncertainty, we remain optimistic for the future of our Middle East region. The policies and actions taken by GCC governments including Qatar were among the largest and most effective globally, and have ensured that both small and large businesses continue to operate under difficult circumstances. We believe these new policies to continue and will translate into future growth as post-covid world, with the vaccine roll outs, present new opportunities to further a positive 2021."

Chart of the quarter

While post-COVID-19 world is a challenge to both businesses and policymakers, it has allowed businesses to accelerate implementation of new technologies.

One of the promising new technologies is blockchain, which has implications for improving the efficiency of business well beyond its origin in the world of cryptocurrency. PwC has recently undertaken a global analysis of the potential economic impact of blockchain which concluded that it will reach an adoption tipping point by 2025 and by 2030 could boost global GDP by as much as $1.7 trillion, creating 40 million new jobs in the process. The GCC countries are leading new technology adoption and are expected to witness growth in GDP due to blockchain implementation in trade and public administration.

The post-COVID world will present opportunities for the region. We believe that governments and businesses in the Middle East must use this period to explore latest technologies such as blockchain, which can potentially have a significant impact on the region’s economy. Implementing blockchain particularly in the areas of provenance, payments and credentials can provide opportunities for growth and improving efficiencies in sectors such as business services, media and communications, transport, and public sector. The GCC countries have taken encouraging steps to embrace technologies such as blockchain and are in prime position to reap efficiency gains the technology has to offer.