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Tue 16 Jun 2020 12:06 PM

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Covid-19 response: How Gulf countries can come out as winners in a post-pandemic world

For entrepreneurs and businesspeople who are able to look through this fog of negativity, this crisis might present a great opportunity

Covid-19 response: How Gulf countries can come out as winners in a post-pandemic world

Dr Niels Zilkens is managing director, head wealth management Arabian Gulf & NRI, at UBS

Covid-19 has hit the world economy hard. Most countries have seen their productivity decline and GDP growth retract, resulting in probably the worst global recession in modern history.

Governments and central banks have reacted swiftly with massive fiscal spending programmes and expansionary monetary policy, alleviating further damage to global economic performance. Nevertheless, most countries will see reduced or negative growth over the coming months, and it might take years for some to fully recover even after the virus has been defeated.

It is likely, however, that there will be significant differences in how well countries overcome the disruption caused by Covid-19, depending on their current economic structure, political system, policy responses, demographic situation, and so on.

Media coverage of the countries and regions worst hit by Covid-19 tends to feature the Middle East in a prominent role. The main argument presented for the dire outlook,  especially for oil-producing Gulf countries, is the dual shock of a severe decline in the price of oil and the adverse effects of the pandemic on economic performance. Simply put: an economy that mainly relies on oil income, trade and tourism will of course take a significant hit in the context of a global demand shock.

In a purely static world, these arguments would certainly hold. However, as we go through this crisis and look what lies beyond, countries in the Arabian Gulf can take a more optimistic view.

Competitive advantages

One of the main concepts in economic theory is that consumers and companies make decisions based on relative prices.

When they look at a set of options, whether it’s where to set up a company, where to go on vacation, or where to live and work, their decision will depend on finding the best choice relative to competing options.

Even now, after Covid-19, countries in the Arabian Gulf still offer very attractive choices, and in some cases improved ones.

Increasingly attractive location for business

First, the ease of doing business in Gulf countries, which is aimed at attracting professionals and companies from abroad, will further improve.

Visa processes have been relaxed in recent years and will probably be further eased. Despite the fact that certain countries have implemented VAT regimes, most still provide a zero income- and corporate profit tax environment. It is likely that this will remain the case for the foreseeable future.

However, tax regimes in alternative regions such as the European Union will likely worsen, given the massive budget deficits generated by the fiscal spending measures in these countries in response to Covid-19.

Financing these deficits will eventually require governments to increase their revenues via raising the tax burden on their populations. Companies and movable talent will not wait until these adverse changes happen. Rather, decisions on which jurisdiction to choose will be taken today based on the expectation of rising taxes in most developed countries. Countries like the UAE could end up as winners from this trend.

Efficient logistics for trade and tourism

Second, international trade has experienced a sudden awakening thanks to supply chains being cut due to measures imposed to fight the global Coronavirus outbreak. As a result, companies will certainly be looking at diversifying their supply chains in order to reduce dependencies. Countries in the Gulf with large and efficient logistic infrastructures can play a pivotal role in gaining market share by leveraging on this.

Other relevant sectors for Gulf countries, such as tourism, could also be affected by the more risk-averse behavior of holiday seekers.

While overall global travel activity has declined and will recover only slowly, those brave travelers who are still keen to make visits abroad will take a long, hard look at where to spend their vacations. The reports on tourists stranded on small islands or in countries with poor logistics during the Covid-19 lockdown will remain in people's minds for some time.

While the thought of being confined to a beautiful luxury island might be enticing for some, most tourists will want to avoid such a scenario and opt for locations with an international airport and ports that offer multiple options to return home,  including repatriation flights.

By the same token, countries that can credibly offer a "Corona Free" vacation in combination with a first-class health care infrastructure will certainly be the preferred option for most travelers.

Positive demographics

Third, most Gulf countries profit from a young and agile population. In contrast, most Western and some Asian countries suffer from an aging population in multiple ways. For example, pay-as-you-go social security systems where the young support the old will become increasingly unsustainable over time, resulting in a large financial burden on the working population and the corporate sector.

This will raise the relative tax burden on younger generations, increasing the incentives for more mobile talent and companies to look for alternative jurisdictions in which to progress their careers and businesses.

The Arabian Gulf is a very viable option, particularly given its intention to direct investments away from the oil and gas sector in order to develop a more diversified economy.

This, in addition to the already young local population, will bring in productive expats to foster growth and drive innovation in promising industries such as renewable energy, artificial intelligence, robotics, and med-tech. The key to attracting and especially retaining talent over a longer period is to provide a safe and inclusive professional, social, and political environment.

Opportunities to be seized

Of course, even the most agile and diversified Gulf countries are suffering from the current  global shock, and their economies will face reduced investment and consumption, resulting in lower growth, for some time. How long this recession will last will depend on many factors,  among which the oil price and global trade activity are probably the most relevant. However, much also depends on the mindset of the people and their expectations for the future.

For the Gulf, the scenario of a short-lived recession followed by a strong recovery looks likely. The local population has seen booms and busts in the past, but the economy has always recovered. This consumption and investment resilience will be helpful in the current crisis.

With the implementation of the right measures, such as swift re-opening of the economy and systematic ramping up of passenger flights, this might be one of the shortest recessions ever, both globally and in the Arabian Gulf.

Agreed, this is in sharp contrast to the mood currently perceived on the ground, which suggests that we will go through a long period of gloom and doom.

However, for those entrepreneurs and businesspeople who are able to look through this fog of negativity, this crisis might present a great opportunity. Let's make sure it doesn’t go to waste.

Dr Niels Zilkens is managing director, head wealth management Arabian Gulf & NRI, at UBS

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