While oil prices remain volatile, non-oil sectors emerge from coronavirus restrictions to provide some sense of stability in Middle Eastern oil-producing states.
The global economy is facing a crisis “like no other,” according to the International Monetary Fund (IMF) in its latest economic forecasts. The global financial institution has used increasingly dire wording to describe the impact of the COVID-19 pandemic on economic performance around the world, with developing markets appearing to be the heaviest hit.
The economy in countries in the Middle East and North Africa (MENA) region are no exception. The region’s economy is set to shrink by 5.7% on average, with conflict-torn nations predicted to see their economy shrink by 13%. Countries that are heavily dependent on oil production for state revenue have already seen painful cuts to social services and public sector wages, with further pain ahead.
Some sense of an end to the historic downturn in global economic output has been compounded by continued uncertainty over oil prices while production cuts set by the Organization of the Petroleum Exporting Countries (OPEC) are phased out. Gulf states have been increasing oil production by over one million barrels per day in July, which could again depress oil prices amid a slow recovery in global demand.
For decades, the economies of traditional energy exporters across the MENA region have seen the development of their non-oil producing sectors more as a long-term ambition than an urgent necessity. The current slump in demand for oil appears to have revealed that these often marginal sections of the economy are now providing a slight sense of stability amid volatile oil prices.
Every country in the world has seen an unparalleled depression in their retail, tourism, construction, and manufacturing sectors, with the MENA region being no exception. Painful wage cuts and job losses were experienced in nations across the region, but changes in consumer behavior have caused radical changes.
For example, online shopping has seen a boom across the region, accelerating an existing trend, with supermarket Carrefour reporting a 917% spike in Saudi online orders in the first half of 2020. For countries with less diversified economies, like Iraq and Kuwait, such developments have done little to ease their economic woes.
While the international oil market is heavily influenced by geopolitical factors and global economic forecasts outside of the control of oil-producing nations, their non-oil sectors have shown to be more flexible and resilient. Long-term ambitions have changed into a short-term source of moderate stability amid chaotic global developments.
Saudi Arabia’s non-oil private sector stabilized in July, ending four months of contraction due to preventative measures against COVID-19. The UAE saw its first month of growth in its non-oil sectors, and Egypt has emerged as one of the best-performing economies in the region, according to Oxford Business Group, even as its stock market has experienced a tumultuous seven months.
While the performance of non-oil sectors have been in no way miraculous, they have provided an important source of revenue and relative stability amid a chaotic oil market. Energy markets still face uncertainty in the short-term over production gluts amid slowed global demand and long-term uncertainty over the longevity of hydrocarbons as the desired fuel source amid accelerating climate change.
The current economic downturn appears to have provided a boost for economic diversification plans in many countries across the region. Dubai has launched a “Great Economic Reset Programme” that aims to bring together academics, economists, and industry experts to produce a more resilient post-pandemic economy, while Qatar aims to attract from foreign direct investment to realize an increasingly service-industry based economy.
In Iran, the government is changing its focus down-stream, attempting to boost its petrochemical production amid continuing sanctions on its oil exports, and Algeria has signaled a renewed focus on mining and agriculture amid an economic crisis that has led to a downgrade by the World Bank.
Besides diversification plans, the region is facing an outflow of low-skilled foreign workers that could trigger increasing automation and the use of artificial intelligence in the Gulf region in particular.
But amid lofty plans, the question remains whether the renewed focus on non-oil sectors will continue when oil prices start to once again increase. A weak dollar has so far not generated much of an advantage for emerging markets, and governments in the region could once again be tempted by the promise of direct state revenue as the region’s “resource curse” might prove hard to break.