Oil and tourists: Middle East starts to feel pain from coronavirus crisis - CNBC

Passengers wear face masks to protect against the spread of the Coronavirus as they arrive on a flight from Asia at Los Angeles International Airport, California, on January 29, 2020.

Mark Ralston | AFP | Getty Images

The fast-spreading new strain of coronavirus is reminding Middle Eastern and other economies just how much they rely on China for business as human activity across the country of 1.3 billion shuts down while authorities race to contain the outbreak.

Oil prices have already been depressed for months, weighed down by buoyant American supply and internecine trade wars. China's new coronavirus epidemic, which has killed more than 600 people and sickened more than 31,000, threatens to plunge the commodity — the lifeblood of many Middle Eastern economies — to further lows.

Oil demand from China — a top buyer of crude from Gulf states — is "significantly down" and consumption has fallen around 20%, or around 3 million barrels per day, according to Andy Lipow, president of Lipow Oil Associates.

"Any extended period of time where we see this decline in demand is really going to further pressure the oil market," he told CNBC Wednesday.

China's oil demand

Ehsan Khoman, head of MENA Research and Strategy at Japanese bank MUFG in Dubai, said that while uncertainty over the crisis' duration makes it hard to quantify its longer-term economic impacts, anything that impacts Chinese demand for foreign exports will have a major effect on the Middle East's economies.

"If the requirement for the crude for the factories and domestic consumption drops, if China is going to be closing for business and they're not going to be demanding that crude, then that has a big impact," he told CNBC. "But we don't know if China's refineries are rejecting that just yet."

"Should lower oil prices endure, then this will be a testing period for MENA regional hydrocarbon exporters... with lower economic growth, fiscal consolidation and potential credit rating downgrades on the table," a February report from MUFG wrote.

Still, "the structural changes the region has shown are commendable," Khoman added, noting that the diversification strategies of many Gulf states and investment in their non-oil sectors should make them more resilient to oil shocks.

Tourism and retail to take a hit

Finance experts say it's too soon to calculate the scale of the hit to global or Middle Eastern business, as no one knows how long the health crisis will last and how severe it will become. But governments and major airlines across the region have suspended their China flights, with some barring visitors who have recently been in China.

Coming at the height of tourist season for the Gulf, this could mean a hit for some countries that welcomes large numbers of Chinese tourists, particularly the United Arab Emirates — the site of the region's first confirmed coronavirus cases.

The UAE sees the highest volume of Chinese tourists anywhere in the Middle East — one in every 16 visitors to the UAE is from China, or 6% of its total tourism — and they tend to spend heavily on Dubai's high-end shopping and on package tours and resorts. Across the Middle East, 2.4 million Chinese visitors traveled to the region last year, comprising 2.7% of the region's total of 91 million tourists, according to CEIC data.

Dubai starts to feel the impact

Chinese shoppers also make up a significant proportion of the global luxury goods market, with Dubai's "China Readiness" strategy developed specifically to cater to Chinese tourists, which numbered at 1 million last year.

Data from Dubai's Tourism and Commerce Marketing department shows 291,662 Chinese travelers visited the desert emirate in the first quarter of 2019; retail analysts expect the majority of that to be lost this quarter. Numbers on the last month's consumption is not available, but tour operators say they've seen heavy cancellations as most air travel between China and Gulf countries screeches to a halt.

During the SARS outbreak in 2003, an epidemic originating in China that killed some 800 people globally and infected just over 8,000, the global Travel & Tourism sector lost between $30 and $50 billion, according to the World Travel & Tourism Council (WTTC).

"China is much more integrated into the global economy than in 2002 when SARS broke out," the EIU report wrote. China's growth already hit its lowest level in 30 years, 6.1%, largely due to the trade war with America. Now the EIU has cut its GDP forecast from 5.9% to 5.4% for 2020 and warns this could drag global growth for 2020 to below 2%, down from 2.3% currently.

Panic worse than the virus?

As China becomes increasingly cut off from the world, international health authorities are warning against panic and shutting borders over the virus fears.

"Previous cases have also shown us that closing airports, cancelling flights and closing borders often has a greater economic impact than the outbreak itself," Gloria Guevara, president of the WTTC, said in a statement in late January.

Rapid and effective emergency plans as well as "quick, accurate and transparent communication is also crucial in order to contain panic and mitigate negative economic losses," Guevara said. "Containing the spread of unnecessary panic is as important as stopping the virus itself."

2020-02-07 08:31:00Z
https://www.cnbc.com/2020/02/07/middle-east-starts-to-feel-pain-from-coronavirus-crisis.html