Integrated logistics in the GCCJune 29, 2020
Dr. Saud bin Abdulaziz Al Meshari, secretary-general of the Federation of GCC Chambers (FGCCC), talks to The Energy Year about the oil price shock’s impact on GCC economies and the resilience of the logistics sector and energy supply chain. Founded in 1979, the organisation protects the interests of the GCC’s private sector both domestically and abroad.
How severe is the impact of the oil price shock on GCC economies?
The oil sector is the main driver of the entire GCC economy, as the revenues of this sector are spent on mega-projects and supporting key industries and their activities. Therefore, the private sector’s activity will be affected by low oil prices, which determine the amount of oil revenues, and in turn, Gulf countries’ expenditures.
This past April, FGCCC prepared a report on the impact of Covid-19 on the Gulf’s private sector. The report included oil prices, which showed that, during the time in which the report was prepared, crude oil (Brent) went a little bit over the USD 30 benchmark (on May 6, 2020), as procedures to resume economic activity began, especially in China, as export data show an increase of 3.5%.
However, projections of oil prices during the rest of the year and next year are not easy to make, and cannot be predicted definitively, with various scenarios – some of which are related to supply, how much OPEC member states and other exporters are committed to production cuts, shale oil production size, oil stocks, etc.
Other scenarios are related to aspects of demand: the rate at which the Chinese economy is recovering, resumption of economic activity, especially aviation, factories and logistics, in addition to other technical aspects and speculations in the coming decades. Therefore, any predictions of oil prices are subject to change as per the changing factors of demand and supply.
As a result of this dual shock, the World Bank has marked down the economic growth forecast of GCC countries to 2.6 percentage points in 2020. This rate can be considered as the cost of the dual shock. This is an equivalent of a USD 43-billion decrease in GDP. Yet, despite the drop of oil prices, the decrease in the World Bank forecast for growth in the GCC is the least in the MENA region, and this shows the importance of health care systems, which are the most advanced in GCC countries, in addition to policy responses.
More countries continue to take measures to gradually resume economic activity, through “co-existence with the pandemic.” It is expected that this transitional period will continue until economic activity is fully recovered, and the demand-supply aspect is settled in the oil market. Prices will continue to fluctuate, which makes it even more difficult at this moment to accurately measure the impact of the dual shock on GCC economies.
How resilient are the GCC’s logistics sector and energy supply chain as they face a crisis of this magnitude?
The logistics services sector has many dimensions, such as transport, transportation, various types of shipping, warehouses, etc., all of which are facing unique challenges with the spread of the coronavirus in almost all countries of the world.
Global air cargo capacity was down to 35% in March, which was the 10th consecutive month of year-on-year declines in cargo volumes. In addition, to contain the spread of the virus, many cargo companies reduced the number of vessels to and from Chinese ports, which led to huge losses for these companies.
As for GCC nations, efforts were made throughout previous years to invest intensively in this sector, as the GCC is considered an important trade centre in global markets. The GCC succeeded in this aspect due to the government diversification strategies.
GCC nations have very good ranks in the Logistics Performance Index 2019, issued by the World Bank, including criteria such as Customs efficiency; quality of trade- and transport-related infrastructure; ease of arranging competitively priced shipments; competence and quality of logistics services including trucking, cargo and Customs brokers; the ability to track and trace consignments; and the timeliness of shipments in reaching their destination within the scheduled or expected delivery time.
Yet, in the current situation, GCC nations have taken measures to increase the readiness of logistics services to be able to cope with the needs of combating the pandemic. It is fair to say that companies operating within certain activities of this sector such as surface and maritime transport, food and drug warehouses, and cargo have benefited from activities related to combating the pandemic, while other activities have been affected, especially air freight, cargo and transport insurance, and financing, in addition to the logistics supply chain.
However, over the medium and long term, GCC nations should think logistically with regards to an integrated logistics services network that would be able to deal with a global crisis such as the coronavirus pandemic.
How do you view the measures taken by GCC governments to help the region’s private sector cope with the challenges stemming from the recession?
Since the beginning of the coronavirus crisis, governments in GCC countries have taken a number of precautionary and protective measures, as well as created comprehensive programmes to protect individuals, the society and the economy from the impact of the spread of the virus. These measures have reflected the deep understanding of GCC governments of the impact of this crisis, as well as the central role of the private sector in advancing development in our nations.
The precautionary health measures have almost brought production to a halt, including most goods and services activity in the private sector, which led to taking exceptional measures to support wages in the private sector; restructuring loans; and postponing service fees, rentals and taxes; as well as providing grants, aids and concessional loans to the most affected sectors, with an aim to maintain a vital lifeline to these activities. These support packages are in accordance with the measures taken by most countries around the world, including developed countries.