The outbreak of a new Covid variant and its effect on the Gulf economy
Soon after the world was hopeful with news of the distribution of vaccines against Covid-19 and the start of the first vaccinations against the virus by Pfizer, a new variant of the virus appeared in the UK. This new variant was out of control, and Prime Minister Boris Johnson announced the decision to implement a new lockdown.
The World Health Organisation (WHO) called on European countries to “tighten restrictions” following the emergence of the new variant. Moreover, the WHO spoke of “initial indications that the transmission of the new variant may be greater,” as well as that it may “affect the performance of some diagnostic assays.”
The outbreak of the new variant shook the global economy once again including the Gulf economy, with the oil market declining again after witnessing remarkable improvements in the preceding period.
This assessment of the situation examines the repercussions of the outbreak of the new Covid variant and its impact on the economy of countries of the Gulf Cooperation Council (GCC).
Gulf economy and how it has been affected by the Corona pandemic
Since the beginning of 2020, the global economy has witnessed unprecedented changes brought about by accelerated developments following the outbreak of Covid-19. The spread of the virus caused a state of anxiety in most world countries, and has brought about a change in normal political, economic and social life. Although the world took serious steps to overcome this crisis, the short and long-term economic effects still exist, and has caused great concern in global financial markets, with the International Monetary Fund (IMF) estimating the size of losses to be approximately $12 trillion, representing a major blow to the global economy. Economy in the GCC countries have witnessed a state of decline since the beginning of the outbreak due to repeated closures, weak economic movement, and lower global oil prices, and as a result of stopping global production and a decline in oil demand. This has had a negative impact on economic activity, particularly in countries that depend almost entirely on oil revenues.
Data shows that Saudi economy fell by 4.6 percent in the third quarter of 2020, a slight improvement compared to a 7 percent decline in the second quarter of 2020. While the private sector shrank by 3.1 percent, the government sector grew by 0.5 percent. The IMF projected the Saudi economy has contracted by 5.4 percent, compared to previous estimates of a 6.8 percent fall. This dip is the result of a steep decline in global oil demand.
UAE GDP fell by about 6 percent during 2020, and the central bank's forecast came slightly better than the expectations of the IMF, which projected the UAE economy contracted by 6.6 percent in 2020.
Sultanate of Oman
The Sultanate of Oman suffered a fiscal deficit of about $7.6 billion in the first nine months of 2020. The IMF projected a fall of 10 percent, and Oman sought a loan of $1 billion due to the decline in its revenues.
Kuwait witnessed a fall of $24.5 billion in the total value of its active projects in the oil, gas and petrochemical industries between late 2019 and September 15, 2020. The IMF projected that Kuwaiti economy contracted by 8.1 percent during 2020.
Qatari economy fell 6.1 percent in the second quarter of 2020 compared to the same period in 2019, according to data from the Qatar Planning and Statistics Authority. Qatari exports decreased by 35.5 percent during the third quarter to 11.3 billion dollars, compared to 17.5 billion dollars in the same period in 2019. The IMF projected that Qatar's economy will shrink by 4.5 percent.
The government of Bahrain announced that the Bahraini economy fell by 8.9 percent annually in the second quarter of 2020, and the IMF projected that the Bahraini economy would contract by 4.9 percent. The figures issued by the Ministry of Finance for the first half of 2020 showed that revenues fell to $2.4 billion, an annual rate of 30 percent less than the first half of the previous year, while oil revenues fell 35 percent.
The new wave of the pandemic and its effects on the Gulf economy
After recent hope of defeating Covid-19 as a result of the development of several vaccines which show high efficacy, promising the world a return to life as we knew it before the outbreak of the pandemic, the British government announced, on December 20, the emergence of the new variant of Covid-19 in the south of the UK. This new variant was out of control, leading to a quick return of countries closing their borders, fearing an outbreak of the new variant. More than 40 countries banned arrivals from the UK due to fears of the spread of the new variant, and suspended flights from the UK to a number of countries worldwide. The WHO called for necessary preventive measures after monitoring the outbreak of the new variant in eight countries in Europe.
Within four days of the first cases of infection of the new Covid variant were discovered in the UK, it had spread to 10 countries. So far, four mutated variants of the Coronavirus have appeared in the world. The first was recorded by the UK, then South Africa (501.V2), then Malaysia, and the fourth in Nigeria, which announced the discovery of a new variant completely different from the British and South African strains. The WHO reported that the two variants discovered in South Africa and UK to be completely different after a comparison. The potential impact of the new variants will become clear in the upcoming period.
In the Gulf, Saudi Arabia, Kuwait and the Sultanate of Oman closed their borders and outlets for periods varying one week to 10 days, subject to renewal. The new closure came at a time when countries of the Gulf were witnessing a massive campaign to vaccinate the population against the virus. Indeed, this will be in several stages that may continue throughout 2021, the priority in the first stage being for the elderly, health workers, and those on the frontline confronting the virus.
There are assurances from virologists that the mutation in the new variant has no effect on the severity and prognosis of the disease, nor on the effectiveness of the anti-virus vaccines. The recent mutation, however, has accelerated the spread of the virus by more than 70%, as confirmed by the WHO, but there is no confirmed information yet on the effectiveness of vaccines against the new variant.
The Gulf economy, in general, achieved a remarkable improvement in the third quarter of 2020 after Covid restrictions were eased, and oil prices witnessed a recovery through which the price of oil reached $51 per barrel. However, after the announcement of the outbreak of the new variant, crude oil prices recorded a decline at the beginning of weekly trading by more than 3 percent. The Kuwaiti Stock Exchange lost about 425 million dinars, or 1.3 percent, at the end of the week that followed the news of the spread of the new variant.
US West Texas Intermediate crude oil fell $1.42 a barrel, or 2.9 percent, to $47.68 a barrel, after it had also increased by 1.5 percent, reaching its highest levels since February 2019.
The impacts include the following aspects:
Global markets: There was a decline in oil prices after a number of countries announced the suspension of their flights. The Saudi market index recorded a decline in its first session after closure by more than 100 points, and by 1.4 percent at 8,566 points, with trades amounting to about 4 billion riyals after an hour of opening. This decline comes due to the return of an economic shutdown following the outbreak of the new Covid variant.
The tourism and travel sector: This sector witnessed a decline as a result of the closure, with losses reaching $300,000 dollars per minute. Aviation in the Gulf states suffered losses of $16.4 billion in 2020.
Foreign reserves: Foreign reserves witnessed a decline of $133 billion during 2020, and if the closure continues into 2021, it will be forced to withdraw from its reserves, which may contribute to creating major problems for the Gulf states because most of their foreign reserves come from oil exports. This decline comes at a time when the Gulf is suffering from high public debt and a deficit in the public budget.
The outbreak of the new Covid variant continues, and the effectiveness of the vaccines against it has not yet been confirmed. It is difficult to determine the extent of its impact on the Gulf economy accurately, but judging by the recovery of economic activity in the Gulf states in the third quarter of 2020, after recording a decline in the first two quarters of 2020, the gradual lifting of most Covid restrictions may lead to Gulf economies achieving growth in the first quarter of 2021, compared to 2020. This would be in the event that vaccines against the new variant of Covid succeed, and aviation movement returns to normal, and OPEC’s production restrictions are eased in January 2021. This all may provide a major boost to the Gulf economy.
In the event that the closure continues and the vaccine does not succeed in combating the new variant and the wheel of economy stops turning, this will compound the current economic crises in the Gulf states, especially countries that suffer from economic problems such as Bahrain, the Sultanate of Oman and Kuwait.