DUBAI: After a year in which global business was buffeted by macroeconomic concerns and geopolitical factors, the outlook for 2020 is likely to be dominated by the very same considerations.
However, with a presidential election looming in the US and a host of “black swans” (such as the killing on Friday of Qassem Soleimani, Iran’s top general) on the international horizon, the potential for further economic volatility is, arguably, greater than in 2019.
For the Middle East and Saudi Arabia, the challenge will be to maintain economic growth while simultaneously staging the big events planned for this year — the G20 gathering of world leaders in Riyadh in November and the Dubai Expo at about the same time.
The eyes of the business world will be on Gulf Cooperation Council (GCC) countries as never before, but the risks — especially for global energy markets at a time of heightened uncertainty in the regional political scene — are significant.
First, the good news: Global economic growth is expected to pick up as 2020 progresses. Both the International Monetary Fund (IMF) and the World Bank expect aggregate growth in gross domestic product (GDP) either just above or just below 3 per cent.
This is marginally better than last year, thanks mainly to the looser monetary policies of the world’s central banks. But, as the IMF warned in its latest report, “downside risks dominate the outlook.”
There are so many variables — from emerging market weakness, through to trade wars, down to the world’s staggering debt pile — that the growth equation could easily be thrown out of kilter. In Saudi Arabia, the margins for error are even finer.
The official figure for 2019 GDP growth was a meager 0.4 percent, and — although this masked a jump in output from the non-oil sector that has been the focus of government policy — the still-dominant oil sector will have to contend with the vagaries of global crude markets.
The Kingdom’s estimate that growth will hit 2.3 per cent in 2020 is based on an assumed oil price around the $60 per barrel mark, but there is little consensus among the energy experts that crude prices can be forecast with any certainty.
An annual survey of energy analysts’ expectations for the end of price for Brent crude showed a range veering from $28 per barrel to as much as $90 at the top, but there was a cluster of forecasts in the $60-$70 range.
Oil spiked by 3 per cent to $68 on global markets in the hours after the death of Soleimani in Baghdad as energy markets feared further disruption to crude exports from the GCC bloc — an example of the kind of “black swan” event that can throw economic policymaker’s calculations off course.
Lower prices mean less revenue, higher more and more deficits — all affecting growth forecasts — for the oil-producing countries of the Middle East.
The main reason why the oil price is so hard to predict is also the same factor that hung over the global economy throughout 2019, and which is still there at the beginning of the New Year: the trade war between the US and China, now moving into its third year.
If the mutual exchange of tariffs between the two countries continues, it is likely to further affect global trade and economic activity.
There were some signs of a truce at the end of 2019, with President Donald Trump agreeing to scale back some tariffs in exchange for Chinese agreement to buy more American-produced goods.
However, there is no guarantee this “phase one” deal will stick, especially as the US is facing an election year in which patriot appeals of “America First” are likely to strike a chord with Trump’s core constituency.
The US-China discord is just as likely to move to a new battleground, such as intellectual property rights or technology protection.
Global risk expert Ian Bremmer, known for his hard-hitting views on the global economy, has predicted that US-China relations could get “dramatically worse” in 2020 despite the partial entente over tariffs at the end of 2019.
For the Middle East and Saudi Arabia, trade wars could potentially increase the region’s trade in crude oil to China and the rest of Asia, especially with the US now self-sufficient in crude. But any benefit from a shot towards greater eastward oil sales would be offset by the negative effect on global manufacturing and commerce from declining economic activity.
A newly confrontational US could also resume hostilities with the EU and European economies over goods ranging from aircraft to wine and cheese sales.
Europe faces a challenging year in any case, given the big British general election majority to pursue Brexit at all costs in 2020.
No economic deal has yet been worked out between the government of British Prime Minister Boris Johnson and his European counterparts. Whatever the outcome, it is difficult to see how it could be good for the economies of Europe.
Other big global economies also face a year of uncertainty. Argentina is struggling with huge budget deficits and a depreciating economy, Turkey appears perennially gripped by financial fragility, and Japan is still struggling with a decades-long legacy of low growth and deflation.
In the GCC region, economic policymakers are facing diverging forces. On the one hand, there are big projects coming up that need to be funded, but governments are conscious of the need for caution in public spending after years of tepid growth and austerity following the 2014 oil-price crash.
Staging G20 will be an expensive item for Saudi Arabia as it rushes to get essential infrastructure — conference venues, hotel facilities and transport links — in place ahead of November’s opening.
An even bigger commitment from the public finances will be the continuing cost of Neom, the Red Sea Development and Al Qiddiya, among other showpieces of Saudi Vision 2030, which aims to reduce the Kingdom’s dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation and tourism.
In the Kingdom’s budget last month, Finance Minister Mohammed Al-Jadaan said that “sentiment is turning positive” on the economy, enabling him to reduce the public spend for the first time in three years.
“In 2020, we still start reaping the benefits of the policies, whether it’s fiscal or economic policies, that we have implemented over the past few years, I’m very confident that the adjustment to spending will not have an impact on economic growth,” Al-Jadaan said.
Analysts say that the Kingdom’s non-oil economy, while expanding quickly, still has some way to go before it can become the prime generator of economic growth.
The UAE faces a similar dilemma, but has opted for an alternative solution. The Expo 2020 business fair — seen by the country’s policymakers as a game-changing event in the country’s history that will propel it to the next phase of growth — is a big cost item that has to rely mainly on public expenditure.
The Dubai authorities signaled an expansionary budget for 2020 to help to pay for the Expo, and to stimulate the economy after several years of real estate-led slowdown.
There is a noticeable consensus that the current year could be the one that gets the UAE economy back on the growth track.
Looming above the global economic scene, as ever, are the international financial markets.
The world’s stock exchanges have, for the most part, enjoyed a decade of growth virtually unprecedented in financial history. However, Middle East markets have lagged behind the global indices to a certain extent.
Some analysts believe that the Wall Street-led charge in equity markets has to stop some time, and point to historically high stock prices and asset valuations as evidence that a correction is looming.
Others look to the high levels of global indebtedness — aggregate borrowings have tripled since the global crisis of 2009 — as an enduring risk to financial stability, especially in the Chinese economy.
The global and regional economy faces significant challenges in the year ahead. Policymakers will be hoping the “black swans” do not exacerbate those issues.