2020 in review

• Last year presented unprecedented challenges for the Middle East and North Africa and the world. The oil-producing Gulf countries suffered from the double-blow of the Covid-19 pandemic and the related collapse in global oil demand. The effects of the Gulf economic slowdown rippled across the rest of the region, where many countries rely on the Gulf for remittances, tourism, and investment flows.

• The pandemic and economic crisis worsened the humanitarian crises in Yemen and Syria and exacerbated unrest in other countries like Iraq and Lebanon. Last year also underscored the deep inequalities in the region – between the oil-rich Gulf states, which had the deep pockets to weather the crisis, and the rest of the region, which was not so fortunate. 

• But the pandemic also presented unexpected silver linings. In Saudi Arabia and the UAE, it accelerated social reform and market liberalization. It also served as a catalyst for digital innovation and transformation in a region that has lagged other parts of the world in technology adoption and spurred a surprisingly swift and seamless transition from face-to-face to online business interactions.

What to expect in 2021

• This year, we expect many of these trends to continue even as the region and the world begin to look beyond the pandemic. The regional economic recovery will hinge on the vaccine rollout, a rebound in international trade and travel, and the recovery of global oil markets to near pre-pandemic levels.

• In addition to these macro-trends, we will be watching closely for shifts in U.S. policy toward the region under the Biden administration. President Biden has vowed to rejoin the Iran nuclear deal so long as Tehran returns to full compliance, a policy shift with significant implications for regional geopolitics. He has also pledged to restore the traditional U.S. focus on democracy and human rights, which will increase pressure on various regional governments, including the Gulf states, Egypt, and Turkey.  

• Finally, we will be watching closely for opportunities emerging from the pandemic and its lasting effects on societies, economies, and governments. The pandemic has underscored the urgency for countries across the region to diversify their economies away from oil and make long-term investments in digital transformation, human capital, and innovation.

We discuss several of these trends and their implications for business in more detail below.

1. Vaccine rollout will shape economic reopenings across the region

As is the case globally, the ability of MENA countries to fully reopen their economies will hinge on the success of their vaccination campaigns. What we have seen of the vaccine rollout thus far has underscored the deep inequalities in the region. The wealthy Gulf countries and Israel have snapped up early doses of the vaccines and launched aggressive vaccination campaigns, while poorer countries have struggled to compete for vaccines, much less distribute them efficiently.

Israel and the UAE now lead the region and world for vaccinations per capita and are on track to vaccinate most of their populations by the summer. The other Gulf states – Saudi Arabia, Qatar, Kuwait, and Oman – were among the first countries to start vaccinations and have secured large numbers of doses but lag the UAE and Israel in distribution. In contrast, Egypt, Morocco, Algeria, and Lebanon did not begin their vaccination campaigns until late January or early February and have received small numbers of doses thus far. Iran, which has seen the highest death toll from Covid-19 in the region, was also late in starting its rollout of the Russian Sputnik V vaccine. Iraq only received its first major vaccine shipment today (March 1), and Tunisia has had to postpone the start of its vaccination campaign due to shipment delays. Populations in active war zones like Yemen and Syria will have to wait even longer.

In the months ahead, we will be watching middle-income countries like Egypt and Morocco especially closely. Like many other developing economies, they will have to rely heavily on cheaper and easier-to-distribute Chinese and Russian vaccines and on international organizations like the World Health Organization and the vaccine alliance Gavi. In contrast to the Gulf states, many of these countries will likely fully reopen their economies before they have vaccinated even half of their populations. If these countries can get large-scale vaccinations underway soon, they may move quickly to lift remaining restrictions on economic activity and travel and relieve the pressure on their struggling economies.

Implications for Business: Israel and the UAE are on track to reach herd immunity by the second quarter and Saudi Arabia by the end of the third quarter. Companies can expect these countries to ease domestic public health restrictions as vaccination rates rise, though some travel restrictions may remain in effect longer. The timeline for lifting restrictions across the rest of the region will vary. Some countries like Egypt have already opted to largely reopen their economies regardless of infection rates, while other countries like Lebanon and Jordan have lifted and reimposed lockdown measures in response to case numbers. We expect these differences in approach to continue

2. Regional economic recovery will hinge on rebound in oil prices and global trade

The regional economic recovery will also hinge on the recovery of global oil markets. Oil prices climbed past $60 per barrel last month and are expected to average above $50 per barrel for the year. This reflects the rebound in global oil demand as the world begins to exit the pandemic, as well as the stabilizing effect of supply cuts by major producers. In December, the Organization of Petroleum Exporting Countries (OPEC) and its allies – collectively known as OPEC+ – decided to extend its historic 9.7 million barrel per day (bpd) production cut accord through at least March. Saudi Arabia – the driving force behind these cuts – pledged in January to unilaterally cut its production by an additional 1 million bpd.   

We expect the OPEC+ producers to largely maintain production cuts in the near term given the uncertainty in the global economic outlook and potential supply increases from Libya and Iran. However, agreement within OPEC+ is fragile. Saudi Arabia and its Gulf neighbors all have high fiscal breakeven oil prices – the minimum price per barrel at which they can balance their budgets – and see it as imperative to maintain prices at above $50 per barrel, even at the expense of output. In contrast, Russia has a much lower breakeven price and, therefore, less to gain from production cuts. This is reflected in varying levels of compliance with production caps, with Saudi Arabia consistently underproducing its quotas and Russia overproducing.

The recovery of global oil prices to pre-pandemic levels is vital to the economic and fiscal stability of the Gulf countries and, by extension, the rest of the region, which relies heavily on the Gulf countries for investment, tourism, and remittances. With the exception of Qatar, all the Gulf states entered deep recessions last year. While the UAE and Qatar, and to a lesser extent Saudi Arabia and Kuwait, have the financial reserves to weather the crisis without major long-lasting cuts to spending, Bahrain and Oman are on much more fragile footing and will need to implement tough austerity measures if global oil markets do not rebound to favorable prices.

The recovery of the region’s non-oil economy – including logistics, events, tourism, transport, and trade – will depend on the full resumption of global economic activity. In the Gulf, target sectors for economic diversification and job creation were particularly hard-hit by the drop in international travel and trade.  We expect that a recovery to pre-pandemic levels will take years and that the region’s non-oil economy, which lacks a large single market, will remain vulnerable to further setbacks caused by the pandemic.  This in turn will pose challenges to economic diversification and job creation efforts across the region that will be felt in the GCC countries and, more acutely, in Iraq, Egypt, and Algeria.

Implications for business: For companies operating in the Gulf, the trend toward more cost-conscious government procurement is likely here to stay, regardless of oil prices. Companies should also anticipate the potential for higher tax burdens, including increases to VAT, expat fees, and commercial registration fees, as well as greater pressure to localize employment and content. There is also heightened risk of non-payment or delayed payment on government contracts, though Saudi Arabia and the UAE have reformed their procurement and payment systems in recent years and may benefit from increased oil revenues, making a repeat of the kind of payment delays seen following the 2014 oil price crash unlikely.

3. Gulf countries will push forward with economic reforms

Closely linked to the question of recovery from the pandemic is the future of economic reforms, especially in the Gulf countries. Strict Covid-19 lockdown measures and the global crash in oil demand dealt a double blow to Gulf government revenues. At the same time, these governments had to step up to fund the public health response and economic stimulus measures. Faced with lower revenues and new demands on their finances, several of the Gulf countries turned to austerity. Already heavily indebted Bahrain and Oman slashed government spending across the board, as did Kuwait. The UAE and Saudi Arabia imposed smaller cuts and looked for new ways to raise revenue. Saudi Arabia, for example, tripled its VAT from 5% to 15%.

Continued investments in economic diversification. While naturally some of these austerity measures have reduced spending on economic reform initiatives, the Gulf countries have largely avoided pulling back on strategic investments in economic diversification. On the contrary, the crash in oil prices has underscored the urgency of these reforms. For example, after announcing last spring that it would cut ~$8 billion from various programs under its ambitious Vision 2030 plan, Saudi Arabia has opted to forge ahead with Vision 2030 spending even at the risk of ballooning near-term deficits. In recent weeks, the Kingdom has unveiled two massive new Vision 2030 programs: (1) The Line, a high-tech 170-km linear city of 1 million residents with no cars, streets, or carbon emissions running through the independent economic zone of Neom in northwest Saudi Arabia; and (2) the Riyadh Vision, which aims to double the population of the Saudi capital by 2030 and challenge Dubai as the hub for regional company headquarters. We expect this rivalry between Riyadh and Dubai to grow over the medium- to-long-term.

Accelerating regulatory and legal reforms. Saudi Arabia and other Gulf countries have also accelerated regulatory and legal reforms to improve their investment climates and economic competitiveness. Last month, Saudi Arabia announced a new wave of judicial reforms aimed at modernizing its legal system, which continues to be based on uncodified Islamic law. While the first four laws under development as part of these reforms will likely have few immediate implications for foreign companies operating in the Kingdom, the broader push to enact clear written laws and improve judicial efficiency, transparency, and predictability is a promising sign for foreign investors. Meanwhile, the UAE has in recent months removed longstanding foreign ownership restrictions across a wide range of sectors and relaxed its previously restrictive citizenship rules for select foreign investors and specialized professionals.

Compared to expensive strategic investments in economic diversification, these kinds of social, legal, and regulatory reforms represent low-hanging fruit. We expect further legal reforms in the months and years ahead as the Gulf countries look to capitalize on the expected rebound in foreign investment following the pandemic. We will be watching the release of new laws in Saudi Arabia closely for insight into how far-reaching the Kingdom’s legal reforms will be. We expect Saudi Arabia to also continue to accelerate its Vision 2030 investments. However, several questions hang over the future of Vision 2030, including whether this level of spending is sustainable and how the Kingdom’s efforts to attract foreign investment, including rumored tax and Saudization breaks, fit with its goal of localizing jobs and content.

Implications for business: For companies operating in Saudi Arabia, new Vision 2030 projects present investment opportunities across a wide range of sectors including sustainable infrastructure, renewable energy, and tourism, but also present risks as the government ratchets up pressure on foreign companies to increase their commitments to the Kingdom and relocate their regional headquarters to Riyadh (see our recent Analysis). In the UAE and other Gulf countries, where economic reforms are less far-reaching than Vision 2030, the opportunities and risks associated with these reforms will likely be comparatively smaller.