GCC economies are rapidly recovering from the repercussions of the COVID-19 outbreak with the support of their enhanced efforts to bring economic diversification.

According to a recent MUFG research note, over-reliance on oil and gas sectors is facilitating GCC economies to move towards underdeveloped private sector. Notably, the COVID-19 pandemic is facilitating regional economies to shift towards new economic models with the aim of strengthening recovery in the region.

Ehsan Khoman, Head of Emerging Markets Research-EMEA, MUFG, said that the countries are relying on the "this time is different" mantra to achieve success. Authorities are realizing that transformation strategies are gaining speed.

"Diversification will require patience given the scale of the structural shifts at hand, but impediments to investments and productivity is being reversed," Ehsan Khoman added.

According to the MUFG report, cyclical tailwinds stemming from robust vaccination programmes and ongoing resumption of economic activities in region are providing necessary opportunities to boost robust recovery. Since oil prices continue to remain firm, deficits are narrowing and funding flows are getting stronger.

Saudi and UAE in the lead

The UAE and Saudi Arabia are projected to lead the real GDP growth for GCC in 2021 in line with the recovery of non-oil GDP, a rebound in domestic demand and higher investment levels.

While the UAE’s full year GDP is yet to be released for 2020 and there is no consolidated data for 2021, high frequency indicators are pointing at a new potential cycle, as per the report.

"The UAE is exceptionally well placed to catch the first tailwinds of any normalization in international travel, with the start of World Expo 2020," Khoman noted.

MUFG is expecting UAE’s fiscal policy to loosen. Noting that oil is at $70/b all, closing the budget shortfall and structural reforms are predicted to continue to achieve 2020 gains.

Effective COVID-19 management

GCC countries' data on COVID-19 infections, mortality rate and vaccination rate indicate the region has been successful in containing the impact of the COVID-19 pandemic. GCC infections and fatality numbers continue to remain negligible due to the rigorous efforts of the governments in accelerating vaccinations and prudent reopening strategies. These efforts are further boosting GDP growth in the region. While recovery is not uniform across all, Saudi Arabia and the UAE are leading the region in robust policy response.

In its report, MUFG pointed out that increasing cases of COVID-19 did not weigh on GCC economic activity over time. At the country level, Saudi Arabia’s mobility stood out in the region having pre-virus mobility levels, followed by Bahrain, UAE and Qatar.

Fiscal pressures have also materially eased on higher oil receipts, non-oil revenue strategies and spending rationalization measures. According to Khoman, rise in oil prices is transforming GCC external account positions, boosting national savings and offering forex support.