The impact of coronavirus on Gulf economies

As the world responds to the coronavirus, public health is of course the number one concern, and by examining how it affects the Gulf Cooperation Council (GCC), it is certainly an issue. Iran has become the most affected state after China, and with that there has been an increase in caseacross the Middle East,resulting in concerns about the capacity of regional health systems to cope with the pandemic.

Beyond the obvious public health crisis, the coronavirus has had a significant impact on the economies of the Gulf, as it has done with other countries in the world. What sets the GCC states apart is the damage that can be caused by a Chinese slowdown. The consequence of an overdependence on energy exports, long regarded as a structural weakness of their economies, has become even more apparent.

At the start of the epidemic, the GCC states publicly expressed support for China and Gulf leaders sent aid. The iconic Burj Khalifa of Dubais was lit solidarity, displaying the Chinese flag and the Chinese phrase, Lets go Wuhan! Saudis King Salmanengaged to send an appeal to President Xi Jinping and to Qatarshipped five freighters carrying 300 tonnes of medical supplies, donated by Qatar Airways. Material and moral support was appreciated and the United Arab Emirates was honored when the spokesperson for the Chinese Ministry of Foreign Affairsincluded in a list of statutes that offered sincere and friendly understanding, support and help.

It is not unexpected. In recent years, China has become the main economic partner of the GCC and, in both directions, the political and diplomatic reach has been considerable. When the Crown Prince of the United Arab Emirates Mohamed bin Zayedtold mehis country confident in its ability to overcome this crisis is ready to give all its support to China, it signaled an important message of support to one of the most strategically important partners of the United Arab Emirates.

Despite promises of support, the coronavirus has had a significant impact on the economies of the Gulf and the line between sensitivity and vulnerability has blurred somewhat. Economic relations have been the foundation of bilateral relations between China and the Middle Eastern states, with Chinese consumer and industrial products making a big breakthrough in MENA markets. Trade between the GCC and China is different, however. As a natural consequence of energy exports from the Gulf, trade is strongly balanced in favor of the Gulf countries. The UAE, with its re-exports from Jebel Ali, is an exception, constantly buying more from China than it sells. (It is worth noting that Bahrain does too, although the volume of bilateral trade is negligible.) In the good times, it is very good indeed, with substantial income in the coffers of the country. ; Gulf State.

The obvious downside is that losing a major market like Chinaeven can temporarily hurt. To some extent, this is true for all states. However, the Gulf States are particularly dependent on energy to boost their economies, with 85 to 90% of federal budget revenue coming from energy exports. This is compounded by the fact that 67% of energy exports from the Gulfsold in East Asia, which means that other non-Chinese trading partners are also suffering economically and cannot catch up.

Oman is a case study on vulnerability; in 2017, China represented around 44% of its exports. This figure is down slightly from the previous year, when it was around 48%. In the summer of 2017, a group of Chinese financial institutions issued $ 3.55 billion readywhich allowed the Omani government to cover its budget deficit. At the end of last year, the state-owned Oman Electricity Holding Company sold 49% staketo Grid Corporation of China, raising $ 1 billion. Despite this, the government still forecast a budget deficit of more than $ 7 billion in 2019, or approximately 9% of its GDP. With an economy already in difficultyThe disconnecting China hits Oman particularly hard.

The other Gulf States are less vulnerable but still quite sensitive to the Chinese economic slowdown. Saudi Arabia has taken advantage of a windfall with US sanctions against Iran, leading to a dramatic increase in oil exports to China,up nearly 100 percent between August 2018 and July 2019. Before the coronavirus epidemic, China held on average between 1.8 and 2 million barrels per day from Saudi Arabia; thisfell 500,000 bpd. Although much less indebted than Oman, the Saudis are very sensitive to the sudden slowdown in demand from the world's largest oil consumer.

One thing that is becoming more and more evident in the Gulf is the desperate need for sustainable economic diversification. All GCC states have launched Vision development programs that are designed to move them away from rentier, single-resource models in the hope that they can move to post-hydrocarbon models. However, these programs rely on the revenues from energy exports to develop their post-energy sectors, and the drop in oil prices in recent years is putting a strain on these efforts. The current shock to the global energy markets, with pricesdown about 15 percentt since the start of the year it has been particularly difficult to manage.

Beyond the impact on trade, other economic effects have already affected the Gulf. Saudi Arabia has suspendedUmrahan Islamic pilgrimage to Mecca which can take place at any time for citizens and residents, and a suspension of the entry of foreign pilgrims coming to visit Mecca and Medina. Beyond the religious consequences for those affected, there is also a material result, as the pilgrimage is an important source of income for Saudi Arabia. Dubai, the rare regional economy not based on energy, is no better off. Its hotel industry has experienced a boom in Chinese tourists in recent years, receiving nearly a million in 2019. Hotels already had their lowest averagedaily tax since 2003, and with the reduction of business travel and the cancellation of conferences, this sector has experienced a coronavirus crash. With so much ridingDubai Expo 2020, the threat of a protracted public health crisis could be devastating for the economy of the emirates. Although more resilient, Abu Dhabi also feels the impact; a cycling race to be held in late February was canceledwhen two Italian participants were diagnosed. As a result, two of its five-star Yas Island hotels, Crown Plaza and W, were Locked.

Although a global pandemic is not limited to economic problems, it highlights some of the strengths and weaknesses of state capacity. For the GCC states, one of the main points to remember is the urgent need for their visions to come true.

Jonathan Fultonis a senior non-resident fellow at the Atlantic Council and an assistant professor of political science at Zayed University in Abu Dhabi. Follow him on Twitter:@jonathandfulton.

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Anything that affects the ability of the Gulf States to supply energy to the market hurts the Chinese economy, which in turn erodes the legitimacy model of the performance of the Chinese Communist Party.

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Jonathan Fulton