Gulf economies rocked by coronavirus and oil price war

As the owner of a Dubai-based event company, John was preparing for the hectic spring months which generate much of the income he needs to pay staff during the quieter and sweltering summer.

But in the past two weeks, it has laid off a third of its staff, while the rest are working shorter hours, their time has been cut by a third or a half, as coronavirus has hit businesses in the main center Middle East financial and tourism industry.

Customers have closed or stopped paying their suppliers because they fear an impending bankruptcy. John is now preparing to use his savings to avoid the collapse of his business. “It’s hard to survive,” said John, who asked that his real name not be used.

Like governments around the world, the Gulf States are shutting down parts of their economies in a decisive attempt to contain the spread of the coronavirus.

Saudi Arabia has suspended most national and international transportation and closed most stores, except supermarkets and pharmacies. The United Arab Emirates urged residents to stay at home and stop passenger air transportation, except for emergency evacuation flights.

But the Oil Gulf is not only facing the economic repercussions of the Covid-19 epidemic. Just as cases of coronaviruses have started to rise, the region has been hit by an oil price war between Saudi Arabia and Russia that has pushed crude prices down to their lowest level in 17 years.

“Their economies could face one of their most serious and serious tests of all time,” said John Sfakianakis, Gulf expert at the University of Cambridge. “A shock to oil prices is bad news for the Gulf States because their budget amortization will be tested.”

Saudi Arabia said last week that it would cut spending by 5% due to low oil and coronavirus prices. This decision echoes the decision to cut spending after a drop in oil prices in 2014-15, including the suspension of payments worth tens of billions of dollars to entrepreneurs.

“Why would you do it [in the oil price war]? It is better to have an ace card that nobody knows. Now we wonder if any of the projects will be carried out, ”said an executive working for a Saudi company. “We should all be ready to bond; we’re all going to downsize because I don’t think our customers will be able to pay. ”

His business closed its headquarters after Riyadh urged most of the private sector to close or work from home last week. A national curfew from 7 p.m. to 6 a.m. started on Monday.

The Gulf States quickly announced major stimulus packages to calm the nerves. After Saudi Arabia unveiled $ 32 billion package to help businesses on Friday, Kingdom finance minister Mohammed al-Jadaan said the country was ready to double debt levels and insisted for contractors to be paid.

The UAE central bank has increased its support program to $ 34 billion, which allows banks to provide businesses and individuals with interest relief and return of capital.

Abu Dhabi, the capital of the UAE and the wealthiest of the seven-member federation, unveiled a 9 billion AED ($ 2.4 billion) stimulus package. Dubai banks offer vacations to pay off debts to those forced to take unpaid leave and offer tuition and shopping plans.

“In these unprecedented times, strong and decisive action is essential to support the economy,” said Mohammed al-Shaibani, director general of the court of the sovereign of Dubai and president of the Dubai Islamic Bank, in a statement.

Unlike some other countries in the Middle East, the Gulf States have large foreign exchange reserves – Abu Dhabi has a sovereign wealth fund of $ 850 billion, while Riyadh has $ 502 billion in reserves.

But Dubai, which depends on the health of regional crude oil exporters and on world trade, does not have the tax cushion for large oil revenues. In 2009, the emirate needed $ 25 billion in loans from Abu Dhabi and the United Arab Emirates central bank while it was going through a credit crunch.

Now, unlike the 2009 debt-triggered crisis, the problem is a sudden collapse in demand, which has affected all pillars of the Dubai economy, said a senior banker.

“It is systematic in all areas. Businesses go to the wall, “said the banker.

A severe recession in the Gulf could spill far beyond the region, with foreigners making up the bulk of the private sector workforce, particularly in services and construction.

Gulf remittances are a major source of foreign exchange for Asian and other Middle Eastern countries, with outflows of $ 44.4 billion and $ 36 billion from the United Arab Emirates and the United Arab Emirates. ” Saudi Arabia respectively in 2017, according to data from the World Bank.

Emirates, one of Dubai’s largest employers, has cut most of its flights and encourages employees to take early vacations and leave without pay to avoid cutting staff.

As global demand wanes, hotel company Marriott has said it is reducing hours and introducing temporary leave to lessen the impact. The occupancy rate of Dubai hotels in the first week of March fell 28% year-on-year to 61%, according to data provider STR.

And as Japan plans to postpone the Summer Olympics, the viability of hosting Expo 2020 in Dubai – which he hoped would attract 25 million visitors from October – is in question. Noting the vigorous measures taken by the United Arab Emirates to contain the virus, the organizers of the Expo said that they would reassess and adjust the preparations planned for the fair in the coming weeks.

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