Countries in the Gulf Cooperation Council (GCC) region were hit particularly hard during 2020 as they faced the dual economic shocks of commodity price declines and slowdowns in domestic activity stemming from the COVID-19 pandemic.
According to a new AM Best report,“Pandemic Intensifies Risk in the Gulf Cooperation Council Countries,” the global resurgence should accelerate economic activity in 2021, although varying degrees of political, economic and financial system risk specific to the region and its members leaves a great deal of risk and uncertainty.
The surge in the COVID-19 virus toward the end of first-quarter 2021 complicates the region’s economic recovery, particularly for countries with lower vaccination rates. With the increase in cases, many governments have progressively tightened business restrictions, which will have negative consequences, said the report..
The new Best’s report, highlights how country risk factors into all AM Best ratings. As part of evaluating country risk, AM Best identifies the various factors within a country that may affect an insurance company directly or indirectly.
Government spending increased as fiscal stimulus programs were enacted to mitigate against the negative economic and health consequences from the pandemic. Debt in the GCC region rose substantially amid the pandemic, to more than 13% of GDP in 2020 from 9% in the prior year, increasing the region’s financing needs. To meet these needs, GCC government debt issuance totaled nearly USD 60 billion through October 2020, well-above the previous full-year estimate of USD 44 billion.
Financing needs will remain acute, as more than USD 100 billion of debt will mature between 2021 and 2025. The region also faces long-term challenges. Despite long-standing efforts to diversify the GCC’s economies, progress has been relatively limited.
Oil and gas production remains the major contributor to GDP in four of the six GCC countries. Energy also accounts for more than 70% of GCC government revenue for all the countries in the region except Saudi Arabia and the UAE. Over the short term, these non-diversified economies will remain vulnerable to external events that limit demand for energy. Additionally, climate change concerns and the move toward more environmentally friendly energy will play a role in demand.
COVID-19 has also exacerbated labor market issues, with rising unemployment rates. The region relies heavily on foreign labor, as a majority of nationals is employed by the public sector. However, a huge number of expat workers, who tend to work in the private sector, migrated from the region, and could further challenge diversification efforts.
The political character of GCC countries has implications for operational risk in the region as well, according to the report. While adopted protectionist measures, such as in Saudi Arabia, likely will diminish companies’ ability to operate efficiently across the GCC region, other members may compete to reduce regulatory burdens on business. Ultimately, GCC members could face competing economic interests as each tries to attract investment in non-oil sectors.
Insurance premium growth has been relatively stagnant in the GCC countries for several years. Whether the current economic uncertainty—and potentially lower government spending/revenue—will continue to affect premiums remains to be seen.