These opportunities include bringing production closer to consuming markets and increasing digitalization of the economy
Dammam, Kingdom of Saudi Arabia: Fiscal stimulus and productive debt represent a game-changing opportunity for technological upgrades as digital transformation sweeps the region; Opportunities in re-shored production and manufacturing as global value chains shift; GCC banks are relatively well positioned to weather the storm, with a combined USD2.3 trillion in assets at the end of 2019; Central banks in MENA countries have collectively injected 3.4% of GDP on average directly into the economy.
The Arab Petroleum Investments Corporation (APICORP), a multilateral development financial institution, today issued a white paper entitled “BEYOND ENERGY: HOW MENA ECONOMIES EMERGE POST-2021” analyzing the economic opportunities and challenges arising from the COVID-19 pandemic in the MENA region.
The paper notes that the impact of the unprecedented 2020 triple crisis – health, economic and financial – across the region is multifaceted, and has widened income and productivity gaps between and within countries. At this stage, only a few countries possess the right ingredients of strong and stable governance, policy credibility and sound public finances management, to translate stimulus packages launched by governments amidst the crisis into productive debt and sustainable recovery.
While countries with large financial reserves were able to inject liquidity in their economies and banking systems, with many funneling resources towards specific industry sectors as well as small and medium enterprises (SMEs), countries with comparatively lesser reserves are facing exhaustion risk if other financing instruments are not found.
As for the banking sector, GCC-based banks have proven to be quite resilient and well positioned to weather the downturn caused by the pandemic thanks to a combined USD2.3 trillion in assets at the end of 2019. Banks with the highest exposure to severely affected sectors such as aviation and tourism are at a higher risk of non-performing loans.
Opportunities in localization
Global value chains (GVCs) were instantly and significantly affected by the pandemic, which has accelerated protectionist trends. In some MENA countries the crisis led to import reductions, export bans, and even import substitution policies in strategic sectors such as healthcare and sanitary products. Egypt has actively encouraged the reorientation of industrial activities towards these sectors in its free trade zones.
This shift in the GVCs landscape, coupled with the accelerating transformation taking place across numerous sectors – including the energy sector – is also opening up new economic opportunities for regional champions in a post-COVID-19 world.
These opportunities include bringing production closer to consuming markets and increasing digitalization of the economy, as well as channeling investments into burgeoning areas which drive energy transitions such as large-scale renewables for hydrogen or other net-zero output.
With the right positioning strategy, the proximity of MENA countries to large consumer markets – particularly the European Union — makes the region an attractive investment partner for MNCs looking to shorten their supply chains.
Dr. Ahmed Ali Attiga, Chief Executive Officer of APICORP, commented, “Countries must act swiftly to take advantage of the opportunities that lie ahead. Economic reform and liberalization could boost foreign and local private investment needed for such plans to materialize. The degree of success in MENA countries’ investments in infrastructure and digitalization and ability to draw investments will also be a key determinant for success in a post-COVID-19 world.”
Dr. Leila R. Benali, Chief Economist, Strategy, Energy Economics and Sustainability of APICORP, noted, “The high concentration of low-cost low-carbon energy producers in the region presents ample opportunities for export growth in a post- COVID-19 world, especially those investing proactively in digitalization and innovative technologies. Two very different examples, Saudi Arabia and Morocco, are already positioning themselves as low-cost exporters of blue and green hydrogen, and as a result are ahead of the curve to take advantage of the twin forces of the energy transition and shifting global value chains.”
Effectively leveraging productive debt
Most countries rolled out large-scale stimulus packages to counter the direct and indirect effects of the COVID-19 pandemic. These included tapping existing reserves, debt capital markets, multilateral and bilateral financing, foreign aid, and others.
A few countries also halted the much-needed economic and fiscal reforms that they initiated pre-COVID-19. Looking at the region as a whole, 2.7% of GDP on average was allocated to fiscal measures, while 3.4% of GDP was directly injected by central banks into the economy.
GCC member states and Egypt have collectively earmarked more than USD130 billion in the form of economic stimulus packages. These measures provide policymakers with a game-changing opportunity for technological upgrades and digitalization, SME support and investment, funding of energy transition and smart infrastructure development.
The double whammy of COVID-19 and low oil prices
With the combination of history’s strongest ever drop in oil demand –more than 20 million barrels/day in April – and non-oil economic contraction coupled with a slowdown in government spending, all MENA countries are expected to experience a GDP contraction this year, with Egypt standing as the sole exception with a modest 2.5-3.5% in forecast GDP growth in 2020-2021.
The Arab Petroleum Investments Corporation (APICORP) is a multilateral development financial institution established in 1975 by an international treaty between the ten Arab oil exporting countries. It aims to support and foster the development of the Arab world’s energy sector and petroleum industries. APICORP makes equity investments and provides project finance, trade finance, advisory and research. APICORP is rated ‘Aa2’ with a stable outlook by Moody’s and ‘AA’ with a stable outlook by Fitch, and its headquarters is in Dammam, Kingdom of Saudi Arabia.