DUBAI/BEIJING: The coronavirus crisis, which has already battered oil prices, threatens to further undercut Gulf economies battling a downturn and struggling to wean themselves from a decades-old energy addiction. The six Gulf states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates – count China as their main trading partner and crude buyer, which soaks up about a fifth of their oil. But China’s energy demand has sagged as authorities lock down millions of people in several cities to prevent the spread of the disease, now named COVID-19, that has killed more than 1,100 people so far.
The knock-on effects for a global economy that is dependent on a buoyant China – the powerhouse which accounts for one third of the growth in oil demand – have seen prices sink to a one-year low. Analysts believe the crisis, which the World Health Organization said this week spells a “very grave” global threat, will undercut the industry and dampen prices. “There is no question that the virus is having a significant impact on Chinese oil demand,” Bill Farren-Price of Petroleum Policy Intelligence (PPI) told AFP. If the lockdowns continue into the year’s second quarter,” he said, “then it starts to look more serious and will have deeper impacts on the real economy”.
Non-oil trade between Beijing and the Gulf Cooperation Council (GCC) has grown from just several billion dollars two decades ago to nearly $200 billion last year. One industry that has taken an early hit is tourism. Over 1.6 million Chinese tourists visited the Gulf states in 2018, most of them heading to glitzy Dubai, and the number had been rising fast. In recent weeks, however, Chinese visitors have been rarely sighted even in Dubai as airlines have suspend routes following the outbreak, threatening the ambitious tourism targets.
The latest shock comes shortly after the International Monetary Fund warned that Gulf states must undertake much deeper reforms or risk seeing some $2.5 trillion in accumulated wealth drain away in 15 years as global demand for oil slides. Oil income is highly sensitive to Gulf states as it contributes more than 70 percent of public revenues. Since Jan 30, a month after the disease was discovered, oil prices have dropped by around 20 percent, slashing tens of billions of dollars from GCC revenues.
An oil price crash in mid-2014 had already seen public revenues dwindle and growth rates tumble, forcing borrowing and a drawdown on assets to plug budget deficits. Major energy-producing countries, which had already cut production in an effort to revive the market, now face a “double whammy” of slumping prices as well as more fundamental economic trauma, said Ellen Wald, author of the book “Saudi Inc”. “The declines, coming at a time of curtailed output, threaten economic shocks that, if long-lasting, could lead to the kind of political and regional instability that was avoided during the last steep drop,” she said in a Bloomberg news agency commentary.
London-based research consultancy Capital Economics also warned that a prolonged impact from COVID-19 could trigger a major economic downturn. “Fears about the coronavirus outbreak have weighed on oil prices and clouded the near-term outlook for the Gulf countries,” it said in a report. “Lower oil prices and a possible deepening of oil production cuts will act as a headwind to growth in early 2020.”
As a result of the sharp decline in oil prices, a technical committee for OPEC and its partners last week recommended additional production cuts of 600,000 bpd to add it to the 1.7 million bpd of cuts already in place. Russia is reluctant to commit however, promising a decision soon. Mohammed Al-Sabban, a former senior Saudi energy ministry official, warned in an article in Okaz newspaper on Tuesday that if the so-called OPEC+ group does not cut production quickly, Brent oil prices could slide to as low as $40 a barrel.
Wald noted that previous price shocks had occurred in 2015 and 2016 because producers were pumping as much oil as they could – a far cry from the current scenario. “In the feared coronavirus scenario, producers such as Saudi Arabia, Russia and the United Arab Emirates would face low prices in conjunction with lower production,” she said, hitting revenues and ability to deliver services. “If the situation lasted long enough, economic instability could have political consequences.”
Meanwhile, China’s leadership yesterday touted “positive results” from efforts to contain the new coronavirus epidemic, but warned it still faced a “large-scale war” against the outbreak as the death toll climbed past 1,100. President Xi Jinping chaired a meeting of the ruling Politburo Standing Committee after figures showed that the number of new cases dropped for the second straight day, fuelling hopes the epidemic could peak later this month.
Xi said there were “positive results” but warned that the country “must not relax” its epidemic control efforts, according to state media, as authorities have kept tens of millions of people under lockdown. China still faces a “large-scale war” and a “big test”, said state broadcaster CCTV in a readout of the gathering.
Authorities said yesterday another 97 people had died in China, raising the national toll to 1,113, while more than 44,600 people had been infected by the COVID-19 virus. The number of people infected on a cruise ship off Japan, meanwhile, rose to 174 – the biggest cluster outside the Chinese mainland. The World Health Organization has called the epidemic a “very grave threat”. Most of the deaths and majority of cases have been in central Hubei province, whose capital, Wuhan, is the epicentre of the outbreak. Some 56 million have been placed under virtual quarantine in the province.
The epidemic has threatened to harm the world’s second-largest economy, with ANZ bank warning that China’s first-quarter GDP growth would slow to 3.2-4.0 percent, down from a previous projection of 5.0 percent. It is also disrupting sporting and cultural events in China, with motorsport governing body FIA announcing the suspension of the Formula One Grand Prix in Shanghai that had been scheduled for April 19 due to the “continued spread” of the coronavirus.
But in a positive development, the number of new cases has fallen in Hubei for two straight days with some 1,600 reported, according to figures from the National Health Commission. Outside the province, the number of new patients has declined every day for the past week. “In general, the number of new cases is now slowly decreasing,” Zhong Nanshan, a renowned scientist at China’s National Health Commission, said in a video conference with medical staff in Wuhan on Tuesday. “When does the turning point occur? I can’t say. But I think it’s at its peak in mid- to late-February,” he said.
In addition to locking down Hubei, authorities have restricted movements in several other cities far from the epicentre in its unprecedented effort to contain the virus. Authorities have found a cluster in the northern port city of Tianjin, where 39 people were infected in one department store, according to the official Xinhua news agency. The first case was a salesperson who was diagnosed on Jan 31.
Several countries have banned arrivals from China, while major airlines have halted flights to and from the country, as hundreds of people have now been infected in some two-dozen countries. The biggest cluster of cases outside China is on a cruise ship quarantined off Japan’s coast. An additional 39 people on board the Diamond Princess have tested positive for COVID-19, raising the total number of cases to 174, while thousands of passengers and crew face a second week in quarantine.
Given China’s economic heft and position at the nexus of global supply chains, the virus is affecting companies far and wide and across multiple sectors across the world. International conferences are also being affected, with this week’s Singapore Air Show – Asia’s biggest – badly hit by exhibitors withdrawing and low attendance. US chip giant Intel, Facebook, Chinese phone maker Vivo, and Cisco, meanwhile, have all withdrawn from the Mobile World Congress in Barcelona over coronavirus fears. – Agencies