Coronavirus: Uncertainty in the Middle East
Gulf Oil exporters to suffer while importers benefit
Measures taken to halt transmission of the virus are reducing international travel and trade, and in the long-term could significantly affect economic growth and global demand for oil.
Arab economies and financial markets are expected to be strongly affected if the coronavirus discovered in China in December continues its rapid spread.
The first confirmed cases in the Middle East were found in the United Arab Emirates on January 29, when four members of a Chinese family that had arrived for a vacation a week earlier from Wuhan, the city at the epicenter of the outbreak, were diagnosed with coronavirus.
Mohammed Al Sabban, a former senior adviser to the Saudi petroleum minister, told The Media Line that news of the virus had disrupted financial markets and led to concerns about global trade and economic growth.
“Although this is not the first time that the global economy has suffered the consequences of such a disease, this one started in China, the second-largest economy after the United States and the main driver of trade and financial transactions in the world,” Al Sabban explained.
The Wuhan coronavirus has created uncertainty and confusion over the extent to which the price of various commodities and services, including oil, will be affected, he said.
“We found that as soon as the coronavirus spread – and spread to other countries – global markets were affected and dropped significantly. The biggest decline was in the oil markets, as China is the largest importer of oil in the world, the second-largest consumer after the United States,” Al Sabban said.
He added that the great damage caused to the Chinese market, the almost stagnant economic situation there and the isolation of many of its provinces from the world had affected demand for petroleum.
Chinese demand for oil decreased by at least 20% over recent weeks, he added, and “the continued spread of the virus means more damage to a variety of global markets, especially the oil market.”
The price of oil hit its lowest level in more than a year on February 3. The Beijing-based China Petroleum & Chemical Corporation (Sinopec), the largest refiner in Asia, cut production this month by around 600,000 barrels per day.
Mohammed Yasin, chief strategy officer at Abu Dhabi Capital, told The Media Line that because China’s economy is so large, the spread of coronavirus has caused a fall in world economic activity, including in consumption and exports.
“Oil prices have been under pressure,” Yasin said.
“Brent [crude] and WTI [West Texas Intermediate, the two main benchmarks for worldwide purchases of] have been dropping constantly because the market is expecting a drop in economic activity from China and in the demand for oil,” he explained. “So their [China’s] imports [of oil] will slow down.”
Nevertheless, Yasin noted a planned meeting of the Organization of Petroleum Exporting Countries (OPEC) where officials will discuss recommendations to cut daily production by 600,000 barrels in order to stabilize markets in light of the expected drop in demand from China over the next two to three months.
“It’s not approved yet, and that’s why the oil prices dropped to around $50 for WTI and $54 for Brent crude,” he stated.
Yasin explained that when the demand for petroleum drops, the economy of any country that relies on exporting it immediately comes under pressure and experiences a budget deficit.
“Expectations are that companies’ growth and the GDP growth in those economies will slow, which will be reflected in the performances of public companies and in a drop in equity markets,” he noted.
“We don’t believe that this is immediately serious, as most of the [financial] results being reported are for the fourth quarter, when there was no coronavirus,” he continued. “The release of results for the first quarter of 2020 will begin in April, so if this virus can be contained over the next two to three weeks, we can talk about damage for the first quarter and catch up in the second and third quarters.”
If the coronavirus continues to spread for more than three additional weeks, Yasin forecasts a major slowdown in GDP growth for China, dropping from an expected 6% annual rate to an expected 5%, and a consequent reduction in GDP growth for all the countries that rely on exporting oil to China or importing goods from there.
“The other effect we have here in the [Arab] region concerns countries that rely on Chinese tourism, such as Egypt,” he went on. “Flights to and from China are now limited, which affects airlines and tourism, and therefore consumer spending. Many Chinese tourists had been visiting the region and spending money in our markets.”
Mazen Irshaid, an Amman-based financial expert who writes for several Arab media outlets, told The Media Line that although oil exporters have been hurt, “this is not the case for the oil-importing countries like Jordan, where the impact is completely different. Amman imports about 90% of its energy needs; the cost… is dropping as global oil prices decline.”
Irshaid added that if the virus continues to spread, trade between Arab countries and China will suffer, as will Arab stock markets, which eventually will contribute to a decline in global economic growth.
First reported: by The Media Line
Author: Dima Abumaria
Original source: https://themedialine.org/by-region/coronavirus-a-blow-to-some-arab-economies-but-not-all/