• Home
• /
• Local business
• /
• Business

GCC needs to provide support to private sector companies

Dubai - GCC governments may take decisions in next few weeks or months that will probably drive the pace of recovery in the region.

In a matter of few weeks, everything has changed around the world as economics have moved from interesting to challenging times, to say the least. The spread of Covid-19 has not only disrupted countries but also communities around the world. Governments have moved quickly to adopt preventive measures in an attempt to contain the spread of the pandemic, which has led to a shutdown of services and halted business activities across the world.
The output loss has left a catastrophic impact on the global economy, which is now swiftly slipping into recession. Consequently, the IMF projects a 3 per cent contraction in the global economy for 2020. The larger concern for markets is now the possibility of deeper recession, or even a depression-like scenario, if the pandemic persists for a longer-than-expected period.
Central Banks and governments have realised the seriousness of the problem, and have accordingly announced unprecedented stimulus measures in addition to loosening of monetary policies. These measures might have helped in restoring confidence, but the extent of the disruption in business activities remains challenging to business continuity and sustainability plans, demanding hostile measures by private sector companies. Hence, it will be imperative for governments and Central Banks to continue providing stimulus measures to support the private sector, by introducing measures that should focus on protecting jobs and ensuring sustainability to avoid a depression, if not a deeper recession.
For the GCC, the shock is twofold as the region's challenges are not just restricted to tackling COVID-19, but include a much more profound concern stemming from lower oil prices. Furthermore, the fallout of the Opec+ countries in March have further worsened the problems, resulting in price war, similar to a 2014-like price crash. However, the drop of oil prices to record led to softening of stance, which pushed the Opec+ nations in April to agree on a production cut of 9.7 million barrels a day in May and June.
Experts believe that this might not be enough to offset the slowdown in oil demand. Further cuts in production could severely dampen the outlook for the region and widen the fiscal deficit across the GCC to as much as 7 per cent-9 per cent of GDP in Saudi Arabia. Alternatively, the GCC's non-oil activity, a pillar of growth, is also undergoing challenging times, especially in tourism, hospitality, and retail sectors.
Liquidity tightening within global markets is also restricting the ability of domestic banks to extend credit disbursements, especially to SMEs. Moreover, lockdowns and shutdown of business activities have been calamitous for companies in sustaining their businesses, as well as hampering their ability to service liability obligations (payments to vendors or bank loans), resulting in defaults or liquidation of businesses. Understanding the severity of the problem, the GCC governments have taken measures by providing relief measures through stimulus packages to boost liquidity and extend credit facilities to the private sector.
Additionally, Central Banks have cut policy rates and other measures to improve liquidity within the system. For instance, the UAE Central Bank launched $70 billion worth of capital and liquidity measures as part of a Targeted Economic Support Scheme (TESS) aimed at providing economic stimulus during the pandemic, while Saudi Arabia has announced stimulus amounting to more than $32 billion.
Although the governments have been proactive in taking measures to support the broader economies, they will have to continue to focus on measures that will have a direct impact on consumption. Firstly, governments must continue to take measures that will directly impact the residents, both locals and expats, in the form of job security and relief packages to reduce the burden on SMEs. For instance, Saudi Arabia has earmarked approximately $18.6 billion package specifically to support SMEs impacted by the virus.
Meanwhile, the UAE government has allowed private companies to re-negotiate employment contracts with the consent of both parties. In another landmark initiative, the UAE has announced a 3-6 month temporary work permit for private sector employees who lost their jobs to the crisis. Secondly, financial support for the affected citizens and private sector companies in the form of subsidies and deferment of loan instalments/payments for short-term, could also provide some much-needed relief to companies and individuals in combating the economic impact of the virus. Finally, the government will need to ensure public health safety and accordingly ramp up its healthcare infrastructure for adequate testing measures. Nevertheless, the GCC already stands a notch higher than its counterparts in combating the crisis with the UAE already easing restrictions amid signs of a flattening curve.
The GCC could also look at measures undertaken by countries such as the UK, Europe, Singapore and Australia, aimed at minimising job losses and providing support to private sector companies. Some prominent instances include the UK's plans to cover 80 per cent of the salary of workers who would otherwise be laid off, and a host of European companies receiving state aid to help them continue to pay wages. Key measures by European authorities also include providing unlimited loans to prevent companies from collapsing and granting sick pay leaves for COVID-19 patients.
The US has initiated similar sick paid leave policies, while also providing temporary unemployment benefits for those affected by COVID-19. In tandem, Singapore and Australia announced stimulus packages to save jobs and support workers, while helping businesses cope with near-term challenges.
In conclusion, the decisions that the GCC governments take in the next few weeks or months will probably drive the pace of recovery of the region. According to the World Bank, the growth downgrade for the GCC as a whole is 2.6 per cent in 2020, worth about $41 billion. It is worth noting that the downgrade for the GCC nations are the smaller compared to the wider Mena region, which can be attributable to the policy responses and advanced public health systems in the region.
In an optimistic scenario, a recovery by the end of the year remains a possibility; however, the damage done during that period would leave a long lasting impact on the region. In other words, the GCC would find it difficult to come out of the crisis as the output loss triggered by the shutdown of companies, mounting job losses and exodus of expats, would not be easily reversible in the short-term. It might be time for authorities to push beyond the traditional boundaries and unveil unconventional measures to restore private sector confidence, and provide the region with an opportunity to combat the crisis. Hence, the onus lies on the government to act prudently and timely to avert a deeper recession or even the possibility of depression.

Shailesh Dash is an entrepreneur and financier and views expressed here are his own and do not reflect on this newspaper.