GDP to Shrink in KSA, UAE, Kuwait

The gross domestic product (GDP) of Saudi Arabia, Kuwait and the UAE are expected to contract this year due to the revival of OPEC++ accord on oil output cut and the non-oil weakness, says a report.

The Brent crude is likely to average US$35/bbl this year despite the current market turmoil, but lower oil production could widen the states' twin deficits, says the Standard Chartered GCC economic outlook report. The potential need for deeper oil output cuts remains the key downside risk to the macro forecasts, it adds.

SAUDI ARABIA
The report said it now expect Saudi Arabia’s GDP to contract by 4.5% y/y in 2020 versus its previous expectation of 5% growth.

"Our downward growth revision primarily reflects the revival of the OPEC++ agreement and our expectation that Saudi Arabia will continue to shoulder a large share of the proposed output cuts. At the same time, ongoing pandemic-related economic disruption means domestic non-oil economic activity is likely to be weaker than be previously expected.

The bank expects a recovery in the next few years, with growth rising to 1.9% in 2021 (1.3% prior) and 2.7% in 2022 (1.6% prior) as oil production curbs are gradually eased and the non-oil economy recovers from the shutdowns in 2020.

Oil GDP to contract, risks remain skewed to the downside.

Renewed oil output curbs are likely to see oil GDP contract y/y versus the bank's previous expectation of a sharp increase following the earlier collapse of the OPEC+ agreement. Recent sharp price declines in the futures markets underscore growing market concern that while OPEC++ production cuts will only kick in in May, near-term storage capacity is exhausted. Against this backdrop, the potential need for deeper output cuts by GCC oil producers led by Saudi Arabia cannot be ruled out.

Further, output reductions pose downside risks to the growth forecasts for 2020. Lower Saudi oil production will widen twin deficits unless prices rebound, the report says.

Notwithstanding the revival of the OPEC++ agreement, the base case remains for Brent crude to average US$35/bbl in 2020 given global oil demand-supply fundamentals.

Ceteris paribus, lower Saudi oil production would mean lower oil earnings for the fiscal and current accounts (C/A). As such, the report expects a wider fiscal deficit of 14.8% of GDP (11.6% prior) and a C/A deficit of 4.8% of GDP (3.3% prior).

"We note that a rise in oil prices would mean narrower twin deficits; while a deepening of output cuts or lower oil prices than we currently expect could mean wider deficits," it said.

UAE

The UAE's GDP is expected to contract by 4.6% y/y in 2020 (1.4% growth prior). The downward revision mainly reflects a revival of the OPEC++ agreement.

Oil output cuts under the agreement will likely see hydrocarbon GDP contract y/y. Lower UAE oil production is likely to adversely impact twin balances, particularly as non-hydrocarbon export earnings are hit by a global recession.

Non-oil economic activity is likely to weaken on external, domestic demand. "We think non-oil economic activity could contract by 4.7% y/y in 2020. We expect the global economy to see its deepest contraction since the Great Depression. The ensuing hit to global trade, travel and logistics is likely to adversely impact external demand for the UAE’s services-oriented economy. At the same time, locally, ongoing virus-related disruptions mean domestic demand is also likely to remain sluggish in the near term," it says.

Businesses face this challenging operating environment with uncertainty over how long it might persist.

To accommodate borrowers facing cash-flow challenges that could impact debt-servicing, the Central Bank of the UAE has announced up to US$70bn (c.17% of GDP) in liquidity support to the banking sector. In addition, federal and emirate-level governments have announced targeted measures, particularly for SMEs, to ease near-term operating challenges (e.g., deferred rental payments, waiving fees, etc.). Taken together, these measures should help ensure business continuity as the economy gradually reopens, the report says.

Looking beyond current disruptions, preserving underlying demand is key. The medium-term viability of private businesses in a range of sectors depends on how quickly and sustainably demand for goods and services recovers. This makes preserving employment a key priority. In this context, the authorities have allowed employers greater flexibility in amending contractual terms, in a bid to prevent outright job losses by under-pressure businesses. Ultimately, however, much will depend on how quickly and sustainably economic activity normalizes, the report says.

KUWAIT

Kuwait's 2020 GDP is now expected to contract by 6.3% y/y (1% growth prior) mainly on a revival of the OPEC++ agreement. Oil production cuts, as part of the accord, are likely to see Kuwait’s oil GDP contract y/y, the report says.

Meanwhile, Kuwait has extended its nationwide night-time partial curfew until May 28. These disruptions will lead non-oil economic activity to contract more than 4% y/y. The headline growth is expected to recover to 2.5% (1.7% prior) in 2021 as oil output curbs gradually ease, it says.

It says lower oil production and weak prices will widen twin deficits significantly. The report expects Kuwait’s fiscal deficit, based on the authorities’ accounting, to widen to 30.3% of GDP in FY21 (year ending March 2021;26.2% prior). Against this backdrop, it appears reasonable to expect budgeted capital spending to be cut. However, should overall expenditure cuts not materialize (for instance, due to higher emergency spending) the fiscal deficit could be wider still.

Unlike its GCC peers, Kuwait has only issued one international bond, in 2017. Parliament continues to resist government efforts to pass a new debt law that would raise a self-imposed debt ceiling, allowing the sovereign to tap global capital markets. "In the meantime, the General Reserve Fund (GRF), part of Kuwait’s sovereign wealth fund, continues to finance government deficits. While FY21 financing requirements may continue to be met by GRF financing, this is unsustainable in the medium term, in our view. However, without a new debt law, alternatives need to be considered. Media reports suggest that parliament has discussed suspending the mandatory transfer of 10% of state revenues into the Future Generation Fund (FGF), among other options, the report says.