The UAE will see faster recovery in the second half of 2021 on the back of quicker rollout of covid-19 vaccine, rise in oil prices, weaker US dollar as well as start of Expo 2020 Dubai, say analysts.
They said the region’s sovereigns, especially Abu Dhabi, Kuwait and Qatar also enjoy strong fund buffers which could help them meet their fiscal deficits for decades to come and cope with the Covid-19 challenges.
Monica Malik, chief economists at Abu Dhabi Commercial Bank, said GCC economic fundamentals will strengthen in 2021, supported by a higher oil price and as the global economy eventually emerges from the pandemic.
She said the rollout of Covid-19 vaccines is very positive for the externally facing GCC economies, providing a path to global and regional recovery.
Malik expects the three largest GCC economies Saudi Arabia, UAE and Qatar to see the strongest non-oil recoveries in 2021, albeit with variations in drivers.
‘The UAE’s outlook is linked to the global outlook and containment of the virus. We see a more fundamental rebound in second half of 2021 than in first half, as the global vaccine rollout will accelerate and hosting the Expo will provide an additional boost for travel and tourism related areas. The weaker US dollar is also positive for external competitiveness, whilst the trade and logistics sector should benefit from stronger global growth and the vaccination programmes, Malik said in the latest note on the region’s economic performance.
The international vaccine programme has shown signs of picking up momentum since end-January, after a slow start.
‘We expect to see the most meaningful recovery from second half 2021 both international and GCC, assuming widespread global Covid-19 immunisation by mid-year, enabling more normal economic activity and behaviour. This should lead to a strong global recovery later in the year. Nevertheless, we expect that it will take several years for the impact of the pandemic to finally disappear, she added.
She noted that the oil price has risen sharply in early 2021, providing a positive upside risk to her forecasts, which are based on an average of $54.7 per barrel for Brent crude versus $`61.4 currently. This could result in a more supportive fiscal position than 2021 budgets imply.
ADCB forecast that aggregate GCC real non-oil GDP growth will expand by 3.2 per cent in 2021, after contracting by an estimated 4.4 per cent in 2020.
Malik expects GCC oil and non-oil activity to reach pre-pandemic levels in a two-to three-year timeframe, not in 2021.
Thaddeus Best, an analyst at Moody’s Investors Service, said sovereign wealth fund (SWF) assets will help to plug some of the additional funding needs of the GCC countries, but the increased drawdown in Oman and Saudi Arabia could lead to substantial erosion over the medium term, reducing the uplift to fiscal strength derived from SWF assets, and would increase external vulnerability risks in Oman.
‘Oman and Saudi Arabia likely to face most material impact on fiscal strength from decline in SWF assets. Under most plausible scenarios, the level of SWF coverage of government debt stocks will fall significantly for Saudi Arabia and Oman, weakening their fiscal strength over the medium term. Conversely, Abu Dhabi and Qatar will be relatively insulated due to their larger stock of assets and smaller financing requirements, said Best.
In the GCC, Abu Dhabi Investment Authority (Adia) is the largest sovereign wealth fund with estimated $723 billion assets. While Kuwait’s Future Generation Fund ($484 billion), Riyadh’s Public Investment Fund ($400 billion), Doha’s Qatar Investment Authority ($349 billion) and Muscat’s Oman Investment Authority ($43 billion) are the other major SWFs in the region. There are some other major sovereign wealth funds as well in the UAE such as Mubadala, Investment Corporate of Dubai etc. and Dubai World.