Covid 19: The latest from the GCC

Following the announcement on March 30th from the Dubai Expo 2020 steering committee regarding the possibility of the event being delayed for a year due to the Covid-19 pandemic, it would seem that the much-awaited Expo is set to become the latest in a long line of global entertainment, business and sporting events, including Euro 2020 and the Tokyo Olympic Games, to be postponed.

Despite billions of dollars being spent in recent years on the construction of hotels and other Expo-related infrastructure, government officials and business leaders in Dubai are choosing to take an open and pragmatic approach, with a view to allowing participating nations and their economies time to regroup in the wake of the crisis and contribute to the six-month showcase at a more upbeat time. Millions of visitors were expected over the course of the Expo which would have featured pavilions from 192 countries worldwide. However, with 611 Covid-19 cases reported in the UAE, including five fatalities (at the time of writing), Dubai’s airports have been shut to passenger traffic as safety takes precedence.

This could increase the short-term strain on the local economy as an increasing number of jobs come under threat. Indeed, the UN Economic Commission for Western Asia has predicted that the effects of the Covid-19 pandemic could render over 1.7 million people unemployed across the GCC. The regional GDP is also expected to shrink by USD $42 billion in 2020, as a result of both the falling oil prices and virus-induced lockdown.

The region’s proud aviation industry is facing the gravest crisis in its history. The AACO, which represents some 30 Arab public and private carriers, has called for support packages including tax relief, waivers of a string of fees and charges, and help with new virus-related costs. They warn that at least 800,000 regional jobs could be in danger without some form of government intervention. Traditionally, the 19 state-owned Middle East carriers have received copious structural support in the past, even those that have posted significant losses. However, given the impending economic contraction, the ability for governments to plug the gap could be severely limited.

As a result, some airlines have resorted to deep cost-cutting measures without delay. Emirates, the Dubai-based carrier, has temporarily issued salary cuts between 25% and 50% as a means of avoiding redundancies. Others have offered staff the opportunity of taking unpaid leave.

For their part, the UAE Central bank recently announced an AED 100 billion stimulus plan as a means of offering support to corporates and individuals overwhelmed by a liquidity and solvency crisis, instigated by both the Covid-19 outbreak and simultaneous collapse in oil prices. The scheme includes an injection of AED 50bn from Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and AED 50bn funds from the banks’ capital buffers.

This has enabled the largest local banks to offer specific measures to their individual clients such as; increasing the loan-to-value ratio for first-time home buyers by 5%, repayment holidays with zero fees for personal loans, auto loans and mortgages as well as interest-free instalment plans for school fee payments.

SMEs impacted by the Covid-19 situation can also apply for three-month repayment holidays on any merchant, equipment or business vehicle loans, while many banks have reduced the monthly minimum balance requirements for corporate bank accounts to AED 10,000. Reductions in charges for trade finance customers are also being offered, as well as enhanced credit lines to cover operational costs.

In light of the exceptional circumstances faced by local businesses, Dubai’s economic free zones have unveiled a stimulus package for their registered entities in the form of a five-point plan including:

– The postponement of rent payments for six months
– Payment instalments
– Refunding security deposits and guarantees
– Cancelling administrative fines for companies and individuals
– Permitting temporary contracts allowing the free movement of employees between free zones

In Saudi Arabia, a SAR 50 billion stimulus package of support to the private sector was unveiled by the Saudi Arabian Monetary Authority (SAMA), with a focus on SMEs. Concrete measures include deferring their loan payments by six months with immediate effect, granting them concessional loans from banks and financial institutions to successfully maintain operations and employment rates as well as covering all POS and e-commerce payment fees for private sector stores for a period of three months (an estimated total cost of SAR 800 million).

These and other GCC salvation packages are expected to be funded, in part, by the sovereign wealth funds who are now channelling some of their billions invested overseas back home to assist with the counter-recession measures being implemented. The Institute of International Finance predicts that this could amount to a total decline in assets of over USD $300 billion (a considerable chunk of the estimated regional SWF net worth of USD $2 trillion) with the bulk of the drawdowns being accounted for in sovereign funds based in Abu Dhabi, Kuwait and Qatar.

Some would contend that the USD $2 trillion cushion has been built principally for situations like these, and that the sovereign wealth funds exist for the very purpose of assisting their governments to navigate the domestic economy through the storm. Indeed, it is expected that Saudi Arabia will likely focus on borrowing rather than drawing down PIF (Public Investment Fund) reserves. The last time oil prices crashed, in 2015, SAMA pulled around $70 billion from global asset managers to help plug the kingdom’s deficit that year.

Still, although many funds won’t make immediate changes to how they invest, the IIF expects that investment activity may slow down or even be indefinitely delayed in some asset classes and increase in others. How much of the reserves end up being withdrawn will depend largely on the effects of the economic slowdown caused both by Covid-19 and the oil slump. We may not have a full picture for a few months yet.

Written by Daniel Pacic, Executive Director, Dominion Abu Dhabi