Islamic countries set to further weaken as COVID-19 crisis hits global economy

The spreading of the coronavirus more widely throughout the Asia-Pacific region, Europe, and North America is hitting consumer confidence hard, sees oil and stock prices drastically fall, and weakens the development prospects of an already fragile economy.

“Global growth could drop to 1.5% in 2020, half the rate projected prior to the virus outbreak,” said Laurence Boone, Chief Economist at the Organisation for Economic Co-operation and Development (OECD) in a press conference Mar 2, giving an interim economic outlook, before the WHO called the outbreak a pandemic on Mar 11.

Four days later on Mar 6, the Asian Development Bank said the global economic impact of the COVID-19 could range from $77 billion to $347 billion.

After the outbreak was called a pandemic by the WHO, on Mar 16, Nigel Green, the chief executive officer of deVere Group, a Dubai-based independent financial consultancy with more than $10 billion under advice, paints an even grimmer picture.

“It’s now almost certain that there will be a coronavirus-triggered recession as both global supply and demand are impacted,” he said in a press release.

A global downturn will hit the countries of the Organisation of Islamic Cooperation (OIC) particularly hard as their markets were already weak before the health crisis.

According to the OIC Economic Outlook 2019 by the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC), OIC nations produced $20.6 trillion GDP in 2018, 15.2% of the total world output.

However, growth slowed by over 18% to 3.1% in 2018 and was expected to decline further to 2.4% in 2019. It is not likely to top that number in 2020.

The financial sector development remained shallow and unemployment at an average of 6.0% is higher than the rest of the world.

OIC member states saw a sharp deterioration in their fiscal balance, with only eleven of the 56 countries in the alliance recording a budgetary surplus in 2018.

GREASY OIL PRICES

For four of the top ten OIC countries by GDP, fuel remained the primary source of export earnings— Saudi Arabia, Iran, the United Arab Emirates (UAE), and Nigeria, according to SESRIC. For example, the UAE recorded $39.9 billion Crude Petroleum and $21.2 billion of Refined Petroleum export revenues in 2018.

The 2020 account balances of oil-exporting countries will be adversely affected, as crude oil prices slumped by over 15% within three months to $53.3 per barrel in February 2020, according to the Organization of the Petroleum Exporting Countries (OPEC).

Rates fell further in March — OPEC’s daily basket price stood at $27.31 a barrel on March 18.

IMPACT ON AVIATION

Airlines won’t benefit from reduced fuel costs as they either dramatically reduce operations or ground fleets entirely because of the COVID-19 travel bans.

The International Air Transport Association (IATA) on Feb 21 said its initial assessment of the impact of COVID-19 shows a potential 13% full-year loss of passenger demand for carriers in the Asia-Pacific region. This would translate into a $27.8 billion revenue loss in 2020 for the region’s airlines. Outside the Asia-Pacific, carriers could lose up to $1.5 billion, said the IATA, which would take global lost revenue to $29.3 billion.

The number is significant but only the beginning, bearing in mind that IATA’s assessment comes before WHO called the COVID-19 a pandemic on Mar 11 as the virus raided Europe, and other travel bans were put in place in later February and March. In OIC member states with typically high outbound and inbound numbers, key states are Saudi Arabia (critically where umrah was put on hold from Feb 27), Kuwait, and Malaysia, and other nations such as New Zealand, and Singapore.

Most recently, Dubai’s Emirates reversed its decision announced on Sunday (Mar 22) to suspend all passenger flights from Mar 25 after lobbying from governments working to repatriate citizens. The airline said it will continue to operate passenger flights to 13 destinations, down from its usual 159.

The Emirates Group has already implemented a temporary reduction of basic salary from 25% to 50% for three months, and other cost-cutting measures include postponement or cancellation of discretionary expenditure, and encouraging employees to take paid or unpaid leave.

Boasting a 31-year track record of making money and recording a 2.3 billion dirhams ($0.63 billion) profit for the year 2018-19, puts Emirates financially in a more durable position than other carriers. The 2019-20 six months results show a net profit of 1.2 billion dirhams ($0.33 billion).

However, the group will be off to a rocky start for its new fiscal year beginning April 1, 2020.     

In the Middle East’s biggest economy, Saudia suspended all domestic flights for 14 days starting Mar 21 after all international flights from and into the Kingdom were halted, also for two weeks, starting Mar 15.

Malaysia Airlines is operating a reduced service from Mar 22 to June 30.

PRIVATISATION TIPPING POINT TO COME?

With oil prices collapsing, the finances of the Gulf States come under pressure, predicts analytics company GlobalData. A quicker realization of power and water privatisation plans may help fill the monetary hiatus.

A case in point is Oman’s deal with China’s State Grid Corporation. For $1 billion, the world’s largest utility company took over a 49% government stake in the Oman Electricity Transmission Company in December.

The financial injection mends the 2020 budget deficit of 2.5 billion rials ($6.5 billion), at least partially, and reduces electricity subsidies.

TOURISM TRAUMA

Reflecting on the effect of the oil price fall Dr. Vasileios Pappas, Senior Lecturer in Finance at the University of Kent Business School told Salaam Gateway: “The Gulf Cooperation Council (GCC) states have taken significant steps to diversify their income streams away from oil into tourism and financial services”.

Indeed, many Middle East and North Africa (MENA) countries deliberately centered tourism in their long-term visions as Saudi Arabia’s Vision 2030, Oman’s clustering system to 2040, and Sharjah’s Tourism Vision 2021 show.

MENA’s tourism grew by 10% in 2018, recording 87 million international tourist arrivals, equivalent to 6% of the world’s total, according to the World Tourism Organisation (UNWTO).

In North Africa, Tunisia recorded eight million international arrivals in 2018. The lift of negative travel advice post Arab Spring and the return of European tourists accounted for Tunisia’s recent double-digit growth rates, reports UNWTO.

Morocco, the largest destination in North Africa, posted an 8% increase in arrivals in 2018, exceeding the 12 million mark. The country’s inbound tourism benefited from a surge of Chinese travelers following the introduction of new air routes, visa exemptions, and targeted digital campaigns.  

But “travel and tourism is uniquely exposed”, warns the CEO of the World Travel & Tourism Council, Gloria Guevara.

“Up to 50 million jobs in the sector are at risk due to the global COVID-19 pandemic,” she said in a mid-March press release.

In the Middle East, Travel & Tourism sustained a total of 5.4 million direct, indirect, and induced jobs in 2018. The number surpassed the impacts of the financial services, banking, mining, and automotive manufacturing sectors, according to WTTC’s 2019 Middle East Benchmark Report.

Saudi Arabia, MENA’s largest destination, accounts for about one-fifth of the $92 billion regional Travel & Tourism GDP. The country cashed in on the ease of visa requirements and the improvement of hotel capacity as well as service and air transport infrastructure.

With the pandemic closing tourist sites, whole borders and even limiting domestic movement in some countries, tourism is guaranteed to suffer significantly.

In Islamic countries outside MENA, Brunei barred citizens from leaving from Mar 16, and Malaysia is not letting in any foreign visitors at least from Mar 18 to Mar 31. Malaysia also, on Mar 18, cancelled its ongoing Visit Malaysia Year 2020 campaign effective immediately. Indonesia on Mar 17 called for the suspension of meeting, incentive, convention and exhibition (MICE) activities, with the government calling for a limit on activities that “promote tourism and the creative economy”.

SAUDI ARABIA AUSTERITY MEASURES

The loss of oil revenue and the 20 billion riyals ($32 billionn) announcement recently to mitigate the COVID-19 impact on the economy, requires Saudi Arabia’s austerity measures elsewhere.

According to the consulting firm GlobalData, the kingdom’s ministries have been instructed to cut budget spending by 20%.

Such cuts may delay the start of sizeable tourism development and infrastructure projects like the $500 billion Neom project, a planned 16-district city on the Red Sea coast, and Amaala.

This 3,800 square kilometre venture, promoted by the Public Investment Fund (PIF), is located within the Prince Mohammed bin Salman Natural Reserve.

Already delayed by over a year, the groundbreaking of the development is scheduled for the first half of 2020.

Once finished, Amaala is expected to generate 22,000 jobs across the hospitality, tourism, and retail sectors.

OUTLOOK

Projecting a positive view, DeVere’s CEO Green goes on to say: “The coronavirus outbreak can be expected to speed up the so-called Fourth Revolution, which is fuelled by new technologies, such as Artificial Intelligence and mobile supercomputing.

“New industries will emerge. This will mean job losses in some sectors and huge, possibly unprecedented, job and investment opportunities in others.”

(Reporting by Petra Loho; Editing by Emmy Abdul Alim [email protected])

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