RaboResearch - Economic Research

MENA Update: Unprecedented external shocks to test the region’s resilience


  • Twin shock is a major test for the oil exporters of the region, although they generally have more firepower to weather the crisis
  • Countries with strong sovereigns and a history of market intervention are better at tackling the current crisis
  • Large migrant population in the Gulf is more exposed to the economic and healthcare impact of the crisis, but this is, by design, also less of a threat for the social and political stability
  • The informal sectors of the oil importing countries are particularly vulnerable to the crisis
  • Lower price of oil is a positive for the trade balance of oil importers, but the negative impact still expected through other channels (e.g. remittances, tourism)

Update on the Middle East and North Africa region

The past months have been particularly challenging for the MENA region, which was hit almost simultaneously by the major drop of hydrocarbon prices and the spread of the COVID-19 pandemic. This delicate situation confronted various governments in the region with the challenge to contain the pandemic with economically-painful lockdowns while providing fiscal and monetary stimulus besides facing increased healthcare and social spending.

Partly reflecting swift and substantial testing, confirmed infections across the region have been comparatively high (particularly in the oil-rich countries), but confirmed related fatalities have been low so far. Depending on the effectiveness of containment measures and the scope of testing, irrespective of their income levels there has been considerable variation among countries. While the numbers of daily new infections in Israel, Saudi Arabia or the United Arab Emirates continue to decline (though from a relatively high level in the latter two), Qatar and Oman still report rising numbers of daily new infections, as does less affluent Egypt. Meanwhile, new daily confirmed infections remain relatively stable at low levels in Algeria, Lebanon, Jordan, and Morocco.

The combination of historically low hydrocarbon prices and the COVID-19 pandemic will have a considerable economic impact on the region that could also have political implications in countries with limited fiscal resources to counter the fallout of both crises and the handling of the pandemic could put local populations’ trust into their leaderships to a serious test.

Oil Exporters

United Arab Emirates

About 32,500 people have been tested positive for COVID-19 so far, while almost 260 related fatalities have been confirmed. Thanks to its economic strength, the country is well-placed to cope with the impact of the pandemic. In contrast to various of its OPEC peers, the UAE’s economy is more diversified, as the Emirates developed into a regional transportation and trade hub in recent years. The country boasts massive reserves in its sovereign wealth funds and a slight budget surplus (0.1% of GDP) – liquid FX reserves amount to USD 100bn, while the foreign assets held by Abu Dhabi Investment Authority amount to 145% of GDP. Nevertheless, oil prices still have a noticeable impact on the non-oil economy, e.g. through channels like tourism from the other Gulf countries.

Moreover, the pandemic has already resulted in a 12-month delay of the long-awaited Dubai Expo 2020 while the services sector in general will be heavily impacted by the global downturn. Large external liabilities of government-related entities constitute the country’s main vulnerability. This is particularly concerning for Dubai, which has a large exposure to the debt of entities involved in transportation (Emirates Airline), shipping (DP World) and food & retail(Dubai Mall). Dubai’s foreign assets and liquid reserves will suffice to cover these obligations, but in a worst case scenario support from Abu Dhabi might be needed, as has been the case in the past.

Saudi Arabia

The pandemic in Saudi Arabia has not spiralled out of control, thanks to early lockdown measures and extensive testing. Although the total number of cases has reached 85,000, the number of deaths stands at 500, one of the lowest mortality rates globally. While the first case was diagnosed on March the 2nd, the country was already in full lockdown on March 25th. After the failure of the OPEC+ meeting in early March, in a bid to capture a bigger market share, Saudi Arabia launched an aggressive price war with its oil producing rivals. While an agreement was eventually reached to cut the production, the low oil prices are likely to persist due to the unprecedented fall in oil demand amid the global COVID-19 pandemic. Saudi Arabia, Kuwait and the UAE have also agreed to additional cuts on top of the OPEC+ agreement. Owing to its higher reserves and a unique position in the oil market, the Kingdom is better equipped than some of its peers to weather this episode. Nevertheless, Saudi Arabia has mostly failed to get its public finances in order since a previous oil price shock in 2014, as the breakeven price of oil for the budget (the price that would balance the budget) has been hovering around USD 80 per barrel for the past five years. The oil price drop, the subsequent cuts in the production and overall bleak outlook for the oil market in the near future have accelerated efforts of Saudi authorities to restructure the country’s public finances.

The Saudi fiscal response to the twin crises tries to balance the need for fiscal consolidation with the need to support the businesses hit by the lockdown measures. In order to increase revenues, the VAT rate has been increased from 5% to 15%, capital and current expenditures are set to be decreased for 2020 and several megaprojects such as Neom city construction will face delays. At the same time, the government announced fiscal support measures amounting to 3% of GDP, mainly directed at supporting the businesses and providing liquidity. As far as foreign policy is concerned, the relationship of the Crown Prince Mohammed bin Salman with the Trump administration have been bumpy, owing to the erratic policy decisions on both sides. It has been reported that the US will pull out some of its military presence from Saudi Arabia (including the Patriot missile defence system), although the country is still considered a strategic partner of the US. If Joe Biden wins the upcoming US presidential elections, we might witness a tougher stance from the US toward Saudi Arabia. Still, we believe Saudi Arabia’s massive FX reserves and the access to cheap debt will certainly help the country to weather this crisis while the main challenges facing the country are long-term in nature (Saudi Arabia’s FX reserves stand at USD 500bn and public debt at just 25% to GDP).


Compared to its population (2.8m), Qatar has reported a sizeable 56,000 confirmed COVID-19 infections with less than 40 related deaths. Extensive testing (covering about 8% of the population so far) is one of the reasons behind the high infection rate, although the number of daily new cases is still on the rise. The pandemic has been particularly wide-spread among the migrant workers, where high infection rates can be partly explained by their oftentimes suboptimal living conditions. On the other hand, the comparatively young age of the migrants to some extent explains the low mortality rates.

The combination of low hydrocarbon prices and additional fiscal spending amid the COVID-19 pandemic will confront Qatar’s relatively undiversified economy with sizeable challenges. However, Qatar’s ability to escape from recent years’ increased regional tensions including its diplomatic confrontation with fellow members of the Gulf Cooperation Council relatively unscathed suggests that policymakers should be able to leverage the country’s strength to successfully manage the current crisis. Qatar is mainly an LNG/natural gas exporter(which account for nearly half of total exports) with oil products coming in a close second. The slump in energy prices will lead to a significant current account deficit in 2020, which is forecasted at around 9% of GDP. However, Qatar’s resilience to external shocks has increased in the past few years amid lower commodity prices and the GCC blockade. Ample reserves and recent years’ budget surpluses that kept public debt at low levels provide comfort. Foreign currency denominated liabilities of the country for 2020 amount to less than USD 50bn, while its reserves (including its sovereign wealth fund) are estimated at USD 367bn. So far, the government has announced USD 21bn stimulus package for the economy (13% of GDP), which will prop up the struggling sectors of the economy.


Oman, along with Bahrain, is one of the most vulnerable countries to the oil price shock and the ensuing COVID-19 pandemic. Notwithstanding recent years’ alarming increase of the public debt ratio, Oman’s breakeven oil price for the budget still stands at USD 90 per barrel. Prior to the collapse of global hydrocarbon prices and the COVID-19 pandemic, assuming an oil price of USD 58 per barrel, the budget deficit had been projected to come in at 8.4% of GDP. Owing to this year’s recession, additional stimulus and healthcare spending, an even larger deficit will lead to a further deterioration of already alarming public debt dynamics. The public debt ratio of Oman has increased from 5% of GDP in 2014 to 59% in 2019, while liquid international reserves currently stand at 23% of GDP. The reserves at the sovereign wealth fund have declined by nearly 30% in 2020, falling to USD 15bn, although it is not clear how this money was spent.

Meanwhile, given only limited remaining oil reserves, there is little scope to boost oil production to compensate for current very low prices. Against this background, Oman’s unemployment rate is expected to increase, which will disproportionately hit the expatriate community in the country. Meanwhile, with more than 8,000 confirmed COVID-19 infections so far and an average daily increase of almost 400 infections in the past days, the global coronavirus pandemic is confronting the government with increasing challenges amid seriously limited fiscal space to simultaneously boost healthcare spending and provide substantial support to uphold domestic demand.


The number of daily new cases of COVID-19 has broadly stabilized in Kuwait, while the number of active cases has somewhat stabilized around 15,000. The number of deaths in the country currently stands at 200, which is relatively high for the size of the country. The fiscal response so far has been relatively limited, as the country opted to strengthen its unemployment benefit scheme and to postpone utility/tax payments for the businesses. Although a double-digit fiscal and a minor current account deficits are expected this year, the country’s massive reserves (USD 600bn in sovereign wealth fund) ensure that balance of payments pressures will be virtually nonexistent.


The combination of historically low hydrocarbon prices and the spreading of COVID-19 is expected to hit Algeria hard, as the country’s government faces the daunting task to restore confidence in its leadership with even fewer resources to counter the economic and human fallout of the pandemic. Government revenues are heavily dependent on hydrocarbon exports, which constitute nearly 90% of the country’s exports. Borrowing on international financial markets is unlikely to offer a way out of the crisis unless policymakers opt for a major change in economic policymaking including the opening of the country to foreign investors. So far, Algeria has been notable for its reluctance to engage with global financial markets. The country foreign public debt is only 2% of GDP, and its budget deficits have been funded mainly through monetary interventions, FX reserve depletion and local debt issuance. Overall, the public debt level is at a manageable level despite recent years’ rapid increase to 45% of GDP.

As Algeria’s twin deficit on the fiscal and current account is expected to widen to 11% of GDP and 13% of GDP, respectively, this year, policymakers will face increasing challenges in financing the deficits. FX reserve depletion and monetization of public debt cannot be relied upon indefinitely. FX reserves declined from USD 114bn in 2016 to USD 64bn in 2019. The same holds for the imposition of additional unpopular import restrictions to avoid an even further widening of the current account deficit. As external debt of the country currently stands at a meagre 3% of GDP, there is still sizeable room to borrow needed funds abroad. Still, unless Algeria’s poor business environment is substantially improved soon, foreign investors are likely to shy away even if the country liberalizes the capital flows into the country. Yet, sticking with the current economic model brings with it increasing risks that public discontent will likely flare up once again as the lockdowns are eased, further spurred by economic struggles and because the government remains largely unpopular.


Bahrain is arguably the most vulnerable country in the region to the oil price shocks and the ensuing COVID-19 pandemic. Similar to some of its regional peers, the number of confirmed cases in the country (11,000 cases) are high owing to extensive testing – the second highest figure globally for tests administered per capita (18% of the population tested). The country has received a bailout from its wealthier neighbours in 2018. Its general risk rating is the lowest in GCC. At USD 100 per barrel, the government’s fiscal breakeven price has also been consistently the highest in the region, which implies that the government will face substantial budget deficits as long as oil prices remain at their current very level.

Consequently, Bahrain’s already very high public debt load (95% of GDP in 2019) is expected to exceed 120% of GDP this year, the second highest figure in MENA after Lebanon (which is technically in default). The basic assumption that supports Bahrain’s sovereign ratings with external rating agencies is that the country will receive a support package again from its wealthier neighbours. This is a likely outcome, but nevertheless is a source of vulnerability for the country.

Oil Importers


Egypt has so far reported almost 21,000 confirmed COVID-19 infections and about 850 related deaths. The country’s strong growth momentum and large internal market will somewhat mitigate the impact from the so-called “Great Lockdown” crisis, but this does not fully negate the fact that certain sectors of the economy are quite vulnerable to the fallout from the global pandemic. This is due to several key reasons: the importance of tourism for the country (about 12% of GDP), high public indebtedness (94% of the GDP), and a high share of the informal economy which entails a large share of people that depend on daily wages to be able to survive. The lockdown measures will have a particularly heavy impact on the daily wage earners, so the poverty rates in the country are bound to rise. In response to the onset of the crisis, the authorities have announced a fiscal stimulus program equal to 2% of GDP with a particular focus on the tourism sector. The cash transfer program to vulnerable families was extended to include an additional 100k families and its budget was increased fivefold. As energy prices plummet across the board, investment into Egypt’s hydrocarbon sector is bound to shrink this year. On the other hand, the public finances have recorded a notable improvement in the past few years, with a good track record with the IMF programs. These helped the country to secure USD 2.8bn provided through a Rapid Financing Instrument from the IMF while both parties will likely reach an agreement on a Stand-By Agreement in the coming months for further relief. In the latest update, the IMF forecasts the Egyptian economy to grow by 2% (down from 5.6% last year). This would put Egypt among the minority of the countries which record a positive growth in 2020 (the only one in MENA region, for example).


Israel’s main source of vulnerability in the last year has been the political deadlock. Three back-toback parliamentary elections failed to produce a clear winner and twice before the main parties could not form a ruling coalition. However, the fourth election was avoided as the main rivals (PM Netanyahu’s Likud party and Gantz’s Blue and White coalition) agreed to form a national unity government, thus ending the 17-month period without a functioning government. The premiership will be rotating between Netanyahu and Gantz and Netanyahu will be at the helm until September 2021. The reconciliation between the bitter rivals was also necessitated by the Covid-19 induced crisis, as Israel faced a swift increase of confirmed infections to about 17,000 so far that could, however, be brought under control since thanks to the imposition of strict containment measures that lead to very low numbers of new infections. Nevertheless, the future is abound with uncertainties for the new government. Firstly, Netanyahu has been indicted on corruption charges and his trial has begun recently. The Supreme Court has cleared the way for Netanyahu to lead the government while indicted, but the outcome of the trial might reshape the government. Secondly, the annexation of (parts of) the West Bank has been high on the agenda of Likud for a while now and it is reported that the government is waiting for a green light from the US to go ahead with it. This move would certainly raise tensions in the region (especially with Egypt and Jordan, both regional partners of Israel and the US) and a military confrontation cannot be excluded as a possibility. While the Trump administration has not publicly expressed its views on the annexation plan yet, the US Democrats have warned Israel against this move, so if they win the presidential elections in November we might see a more cautious approach by Israel.


The pandemic has worsened the economic woes faced by Lebanon. Thankfully, the healthcare impact of the pandemic has been largely contained due to a timely response – the total number of confirmed cases is comparatively low at 1,220 with 27 fatalities, one of the lowest in MENA. The government has yet to reach an agreement with its international creditors about the restructuring of its massive debt load (USD 90bn). The government recognizes the need for structural reforms and came up with draft proposals that reflect the gravity of the situation. An agreement with the IMF is not excluded and both sides have expressed willingness to cooperate, but the political impediments on the way of this deal (particularly regarding the inevitable conditions attached to IMF support) are massive, but not insurmountable. Therefore, political and social stability unlikely to be fully restored in the short-term.


Although the direct damage from the COVID-19 pandemic to Jordan has been limited, the initial estimates by the IMF predict a 3.8% real GDP contraction in 2020. It is yet unclear how well Jordan can recover from this downturn starting from 2021 onwards. International support for Jordan will help the country in the short-term – Saudi Arabia, the UAE and Qatar all have pledged grants and investments, totalling more than USD 3bn. Jordan is the third biggest recipient of the US foreign aid globally and a USD 1.3bn EFF program has been recently agreed with the IMF. Nevertheless, the dependence on foreign assistance is a testament to its weak economic position and puts it at the mercy of its allies. Moreover, if Israel were to annex (parts of) the West Bank (as Israeli PM Netanyahu hinted at repeatedly), massive protests will certainly erupt in Jordan, as around 70% of its population are of Palestinian descent. Tourism receipts have been a major driver of economic growth in recent years, so the downturn in global travel in 2020 and beyond will put the flourishing tourism sector of the country under immense pressure (tourism revenues were 12% of GDP in 2018). Lower oil prices will provide a much needed relief this year. On the other hand, the economic contraction in the neighbouring oil exporting countries means a decrease in remittances from these countries.


The COVID-19 pandemic is expected to cast a shadow on Morocco’s economy this year, as the country is expected to suffer a recession with GDP expected to contract by 2%. However, the longer-term outlook remains broadly positive. The hit on the tourism sector (8% of GDP), combined with a poor agricultural season (droughts) and the downturn in the EU (Morocco’s main trade partner) will all have their impact on economic activity this year. Moreover, Morocco was notable for its expanding car and aeroplane parts exports, but these sectors will be among the hardest hit by the crisis, resulting in downward pressure on Moroccan exports, while lower oil prices will provide some relief for the current account. Nevertheless, the country enjoys low government debt yields and has secured a deal with the IMF for emergency financing, while public debt is expected to remain sustainable in the near term, enabling the government to increase healthcare spending and provide fiscal support to the economy. Thanks to the country’s containment measures, the number of new infections currently amounts to less than 50 per day while the total number of confirmed cases of about 7,500 is relatively low, which augurs well for a gradual opening of the economy, including the country’s tourism sector.


Tunisia was already going through a period of low growth and the pandemic will only exacerbate the situation. In terms of the outbreak inside the country, Tunisia seems to largely overcome the pandemic, with about 1,100 cases so far and only 40 new cases in the past week. Nevertheless, the impact of the extended lockdown and the fall in tourism revenues will be felt throughout the economy. The unemployment rate is bound to shoot up from an already high level of 14.7% at the end of 2019. Furthermore, the manufacturing sector (garments industry in particular) will also suffer this year due to demand shortages in the main export markets (Europe in particular). In its most recent growth forecast, the IMF predicts that the Tunisian economy will contract by 4.3% this year, but the risks to this outlook are strongly tilted to the downside. Tunisia has secured USD 0.7bn IMF emergency loan to help the country with the external financing needs. Although the public debt of the country has been on the rise in the last decade (71% in 2019) and despite the fact that it is overwhelmingly FX-denominated, the debt is mostly provided by official creditors, which brings with it low related interest expenses for the government compared to regional peers.. Currently, Tunisia “only” spends 8% of its government revenues on interest payments, while this figure is 43% in Egypt. Nevertheless, the debt burden still narrows the fiscal space of the government and weighs on its ability to reduce the risk of structural damage to the economy at a time when the country desperately needs accelerating, inclusive growth in the coming years.

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