Middle East faces a long, ‘ugly’ recession: Experts

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The Mall of Dhahran, Saudi Arabia. Plunging oil prices, due to oversupply amid plummeting demand, will prove to be a brutal double whammy for countries that have traditionally relied on oil revenues to support state budgets. -- File photo
The Mall of Dhahran, Saudi Arabia. Plunging oil prices, due to oversupply amid plummeting demand, will prove to be a brutal double whammy for countries that have traditionally relied on oil revenues to support state budgets. -- File photo

By Alicia Buller

DUBAI -- The Middle East is facing a long and “ugly” recession as the coronavirus pandemic stifles economic activity, experts said.

The IMF predicted last week that coronavirus would likely cause the greatest global recession in nearly a century, with the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region set to contract by 3.1 percent in 2020. Oil exporters in MENAP will contract by even more – 4.2 percent.

Plunging oil prices, due to oversupply amid plummeting demand, will prove to be a brutal double whammy for countries that have traditionally relied on oil revenues to support state budgets.

“We should remember that we still haven’t figured out how deep the economic impact is since the virus is still playing out. From an experience point of view, there is no parallel to draw lessons from as this is a unique crisis that has affected both demand and supply,” said Raghu Mandagolathur, head of research, Kuwait Financial Center.

Mandagolathur predicts an “ugly” combination of a “U” and “L” shaped recession in the coming months. A U-shape graph would suggest that recovery will take a couple of quarters, while a dreaded L-shaped recession occurs when an economy does not return to trend line growth for many years.

The Kuwait Financial Center expert said any economic comeback is contingent on jobs and confidence about future, government support and business confidence. “Right now, there are too many unknown unknowns,” he said.

Double-dip recession ahead?

Wes Schwalje, COO of Dubai-based Tahseen Consulting, said that while the region is rooting for a quick, strong V-shaped recovery, which would return jobs, incomes, and business sales to pre-coronavirus levels, it remains unclear if the multi-trillion-dollar stimulus packages being passed by governments around the world will be enough.

He said this concern is particularly relevant in the MENA region where government austerity, falling business investment, global economic weakness, and weak consumer spending could mean a longer and slower economic recovery.

“The situation is made even more complex in the MENA region as we head into Ramadan and Eid. It looks increasingly likely that our region could experience a double dip, W-shaped recovery,” warned Schwalje.

The holy month usually coincides with an uptick in consumer spending. A 2015 YouGov survey of consumer behavior in MENA during Ramadan found 60 percent spent more during the month, and 31 percent defer major shopping purchases for the Ramadan sales.

“If the coronavirus can be contained, a post-Eid easing of lockdown restrictions is likely to initially boost economic activity. However, the effects of unemployment and bankruptcies will only then start to take hold,” he added.

Schwalje said even with the gradual easing of the lockdown measures, social distancing measures will continue to choke the tourism industry – a key economic sector across the region.

Morphing supply chains

There are already signs that regional supply chains will change dramatically as MENA countries look at becoming more resilient as the coronavirus crisis carries on, and in an effort to mitigate the risk of future similar scenarios.

As the crisis has evolved, a number of MENA countries have become aware of vulnerabilities in their supply chains related to accessing medical supplies and food.

“We are seeing some MENA countries introduce export controls and restrictions, as well as double down on investments in innovative technologies that have the potential to build national resilience, like agritech and medical technologies,” Schwalje said.

The coronavirus has also exposed weaknesses in quasi-monopolistic structures in vital industries, like supermarkets, food delivery, healthcare, and other sectors, where profit is potentially being prioritized over public interest.

“This undulating, unclear role of what should be the role of the government vis-à-vis the private sector in vital industries could lead to a new era of manufacturing and industrial sovereignty in the MENA,” Schwalje said.

A U-shaped possibility

Gary Dugan, CEO of The Global CIO Office, said he expects a U-shaped recovery.

“We could be bumping along the bottom of the U for a year. Until there is a vaccine for the virus life will struggle to get back to what we had experienced before. The longer the phase of much diminished global growth the greater the amount of damage to businesses and employment,” Dugan said.

Over the long term, Dugan said he expect companies to substantially diversify their suppliers by company and country.

“Companies will have learnt a salutary lesson that the supply of vital components can literally go to zero within a month or even a day. With companies minded to diversifying their suppliers this could be a new opportunity for Middle East countries to become major hubs to manufacturing. The countries provide cheap energy, extremely good logistics and an available young workforce,” he explained

While the diversification of suppliers won’t happen overnight, Dugan expects that over time smaller countries in Asia, the Middle East, Africa and parts of Latin America to benefit over the longer term.

“The main loser could be China. The lack of seeming transparency about the virus has unnerved companies who trade almost exclusively with China,” Dugan concluded. -- Al Arabiya English


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