In our interview with Jean Claus, CEO Euler Hermes Middle East, shares his views on how destructive Covid-19 has been to the global economy, the twin shock of Covid-19 and the sharp drop in oil prices which are posing extreme challenges to Middle Eastern oil economies and their implications, and the possible staggered recovery scenarios.
Mr. Claus also highlights some of the biggest risks GCC countries are facing and provides a few risk mitigating strategies.
A French national, Mr. Claus has been leading the Middle East division of Euler Hermes, the world’s leader in trade credit insurance. With more than 15 years of experience in the sector in Europe and in the Middle East, Jean Claus is profoundly convinced that trade credit insurance provides confidence to trade safely for businesses and to support prosperity at global level.
In the Middle East, Euler Hermes operates in partnership with and provides reinsurance support to a number of selected locally licensed insurance companies, which issue Trade Credit Insurance Policies designed and approved by Euler Hermes in its capacity as a re-insurer.
Here are the main excerpts:
AG: Could you please give us a perspective on how destructive Covid-19 has hit the world economy and specifically the GCC?
Jean Claus: Euler Hermes expects the global economy to contract by -3.3% in 2020, representing the strongest decline since WWII. Before the Covid-19 pandemic, We had expected a +2.4% increase in global GDP, hence our adjusted projection translates into correction by -5.7 percentage points.
Global trade we expect to shrink by -15% in volume terms (+1.8% pre-pandemic) and, as the US-Dollar is generally appreciating now, by -20% in USD terms (+2.3% pre-pandemic).
Global business insolvencies are forecast to rise by +20% in 2020 (+6% pre-pandemic).
We expect GDP in the GCC region to contract by -2.1% in 2020, compared to our pre-pandemic estimate of +1.5%.
AG: Your report says that the Middle East is facing the twin shock of Covid-19 and the sharp drop in oil prices. Please explain.
Jean Claus: Like most other regions and countries in the world, the Middle East economies suffer from the Covid-19 pandemic through various channels: lower export demand from abroad, disrupted supply chains, capital outflows, and sharply lower tourism. In the oil and gas exporting countries in the region, lower hydrocarbon revenues and in some cases also lower oil output (if complying with the latest OPEC+ output cuts) add to the downturn. Lower fiscal revenues will, for example, limit the fiscal stimulus space for governments in the region.
AG: How do you foresee the recovery process or stages for restarting economies before its back to business for countries and GCC economies?
Jean Claus: Our figure attached shows how we see the recovery process for most economies. For the GCC, we currently do not expect a fresh virus outbreak in our baseline scenario. Hence the gradual opening of the economies that began in Saudi Arabia and the UAE at the end of April and has been announced for May in the other countries should continue until the third quarter of 2020 when stage 3 is beginning. Stage 4 will be entered in the first half of 2021.
AG: In the absence of monetary policy, what are the options for GCC countries to enable a quick recovery?
Jean Claus: We do not regard monetary policy of being “absent” in the GCC. As the six GCC member states follow more or less the US Fed’s monetary policy, they have lowered interest rates in line with the Fed.
But in the absence of “own” monetary policy specifically targeted to the needs of particular economies, fiscal stimulus is the only other option to support a recovery. However, the collapse in oil prices has limited the room for fiscal manoeuvre. Hence, the recovery might take longer but compensated by the fact that the government have acted quickly to contain the Covid-19 outbreak.
AG: What are some of the biggest risks GCC countries are facing in the wake of Covid-19 and what risk mitigating strategies can they adopt?
– The risk of currency devaluation, especially if oil prices remain low for longer. Mitigating would be fiscal austerity, but …
– …that leads to the risk of a much sharper than currently expected downturn.
– Bahrain needing more financial support from the rich GCC countries (likely) and/or Oman also needing support at some point (possible). Mitigating would be if the support comes; likely to come as Saudi Arabia, UAE and Kuwait want to maintain the currency peg to the greenback.
AG: How do you see the sudden and unilateral decision taken by Saudi Arabia to triple its VAT? What are the repercussions?
The Saudi riyal has been under market pressure recently as the collapse in oil prices has drained fiscal revenues, and assets in the sovereign wealth funds (SWF) have been used in part to finance the fiscal deficit. However, as Saudi Arabia does not want to run down its SWFs too much, it has also switched to fiscal consolidation/austerity – while the opposite would be needed to support the economy amid the Covid-19 crisis. The tripling of the VAT rate was only part of the austerity measures, but the headline grabber.
The repercussions are:
– Slightly smaller fiscal deficit in 2020 (reduction by 3.5pp of GDP, but should still come in at around -10% of GDP).
– Rise in inflation perhaps to 5-6% in 2020.
– Combined with other austerity measures, this will dampen domestic demand, notably consumer spending and public investment.
– As a result, the economic downturn will be deeper and the recovery will take longer.
– On a positive note, austerity should help to ease fears of a devaluation of the Saudi currency