Within a week of the WHO declaration of a pandemic, and the imposition of severe lockdown measures, most states had announced policy measures to offset the impact of the crisis. The first measures came from central banks, as they worked to ensure liquidity and mitigate the risk of a credit crisis developing.
Those countries with pegged currencies were anyway compelled to cut policy interest rates, mirroring moves by the US Federal Reserves and others also made similar moves, including a 300bp cut by Egypt. In addition, central banks announced a raft of stimulus measures focused on facilitating bank lending and easing the burden of loan payments for companies facing a temporary cash crunch, particularly SMEs.
One of the largest of these was the UAE’s Target Economic Support Scheme, which initially allocated $27bn in liquidity through zero-interest loans to banks and cuts in capital reserve requirements, while Saudi Arabia offered $13bn of funding to support banks in deferring loan payments and Jordan provided $0.8bn in liquidity by reducing the deposit reserve ratio from 7% to 5%. It is difficult to judge how effective these measures have been. The fact that interbank lending rates have generally fallen back, after an initial spike in March, is one indicator that the monetary response has been somewhat successful. However, it is less clear how accessible new lending is to help businesses impacted by the crisis.
Businesses have, though, received some relief from government cashflow management measures. These range from a commitment by the Saudi government to expedite the payment of $13bn in arrears, to the extension of payment deadlines for taxes. Kuwait, for example, has given firms a six-month extension for the payment of corporate social security contributions. Many states have also permitted the postponement of other payments due to the state, such as loans. These kinds of policy measures will have an impact on government cash flows and on quarterly fiscal outturns, but in theory should balance out for fiscal year as a whole, unless further extensions are granted.
Alongside the monetary announcements and cashflow measures, governments have rolled out a wide range of fiscal policies, including both stimulus to bolster the economy but also consolidation measures in response to sharp declines in revenue. Often, but not always, these policies are announced with an estimate of their magnitude. However, it is difficult to access the net effect of all these policies because multiple measures can be bundled up into a single announcement, there is considerable potential for double counting.
For example, one of the most substantive announcements came on 11 May when Saudi Arabia announced multiple fiscal consolidation policies including a tripling of VAT, an end to cost of living adjustment benefits and spending cuts, all of which were estimated to total to around SR100bn ($27bn). We estimate that the higher VAT might raise about SR40bn more revenue this year (and much more in 2021 as consumption rebounds and it is applied throughout the year) and the cost of living should save about SR10bn, which implies that the spending cuts would total about SR50bn. However, it is unclear if this repeats the SR50bn in cuts announced back in March (we assume it does). Moreover, the Minister of Finance has also indicated that announced cuts will broadly offset new spending, including on healthcare.
There are similar challenges in assessing the package of fiscal measures announced in other Middle Eastern states, particularly when off-budget measures, such as financing salaries of furloughed workers from social security funds, are included, not to mention possible spending by sovereign wealth funds. Looking just at GCC, we estimate that the sum of fiscal measures announced so far may range from as much as a 1.9% of GDP stimulus for Bahrain in 2020, which has announce a wide range of policies in both directions, to a -4.9% of GDP consolidation in Oman, where the main move has been a -10% spending cut, rolled out in two phases. There is considerable uncertainty in these estimates, perhaps by about +/- 1% of GDP, and of course further measures are likely to be announced as the crisis evolves. However, these figures, shown in the graph below, give a sense of the wide differences in fiscal responses across the Gulf in both magnitude and type.
These fiscal moves will inevitably have an impact on economic growth, on top of the direct demand shock from the virus and lockdown. It is notable that the largest net consolidation comes from Oman, the most fiscally constrained state. Saudi Arabia’s apparent decision to consolidate (on top of spending cuts already planned in the 2020 budget), despite its reserve buffers and relatively low debt, is particularly notable. Although Bahrain has less fiscal space, expectations of further GCC support may underlie its apparent decision to apply a net stimulus.
The impact of the fiscal policy responses, which would be substantial in normal times, are modest relative to the hit to revenue resulting from much lower oil prices and production (see the outlook discussion on the next page). As a result, all of the Gulf states, along with others in the Middle East region, will have large deficits to finance for several years.
Several countries have got ahead of the financing challenge through early issuance. Qatar, Saudi Arabia and Abu Dhabi have together issued $27bn in eurobonds since the start of the crisis and even Bahrain managed to issue $2bn and Oman raised over $0.5bn in local debt. The Saudi Ministry of Finance has indicated that its borrowing could reach $58bn for 2020 as a whole, more than twice its original plan.
Another major source of financing for the region are sovereign wealth funds. Some of these funds were developed for rainy days like this, but few states have clear mechanisms to determine how to draw down on them. Saudi Arabia is the clearest cut as it has already been part-financing deficits from its reserves with SAMA for several years and even included a three-year schedule for this in its 2020 budget. Kuwait, which has foreign assets equal to over five times its GDP, more than any other country, faces a unique challenge because most of those funds are locked away in its Reserve Fund for Future Generations, which it can’t access without approval from a reluctant parliament. The parliament has also not authorised new borrowing, forcing the government to draw down on its rapidly diminishing State General Reserve Fund. Oman is also likely drawing on its similarly named fund, and on several smaller ones, as its pre-crisis plan to largely finance its deficit through debt issuance and sales of stakes in state-owned enterprises now looks unlikely to work.
Iraq is also seeking GCC support, although an alternative, or complementary approach, for them both could be to go to the IMF. Several other Middle East states such as Jordan and Egypt, have already done this and have been allocated $0.4bn and $2.8bn, respectively, from funds fast tracked in response to the crisis. Any support from donors inside and outside the regional will likely be conditional on restrained fiscal policies.