Middle East brief: post-Covid-19 supply chains

Register for the webinar

Join editorial director for the Middle East and Africa and author of the report, Pratibha Thaker, as she examines the impact of Covid-19 on supply chains in the Middle East in further detail in our upcoming webinar “Opportunity knocks: post-pandemic supply chains in the Middle East.”

Date: Wednesday, 30 September 2020

Time: 10:00am ET / 3:00pm UK

• A historic downturn in international trade has occurred in 2020, which has jolted global value chains and led Middle East-based companies to question the wisdom of their supply chain strategies.

• The Middle East has a renewed focus on building supply chain resilience by shortening and diversifying supply lines, while protecting links to crucial international suppliers and customers.

• We expect the region to continue to invest heavily in trade-facilitating infrastructure and digital transformation as it attempts to enhance its position as a hub for international commerce.

Globalisation was already stuttering before Covid‑19 hit the scene. Resurgent nationalist instincts, higher tariff barriers and a broadening of sanctions have disrupted crossborder trade and undermined global value chains in recent years. The Covid‑19 pandemic has worsened the situation dramatically in 2020 as governments implemented lockdowns that placed large swathes of business under tight operating restrictions or even suspended operations altogether. Economies in the Middle East and elsewhere are emerging from lockdown and gradually recovering, which presents a unique opportunity to re-examine their foundations and rebuild a much stronger trade ecosystem. Some Middle Eastern businesses will shorten and diversify their supply chains, in effect trading efficiency for resilience, while others may take advantage of new technologies to enhance efficiencies and build resilience at the same time. Standing still looks an unattractive option given the risks exposed by Covid‑19 and intense competition to survive and thrive in a post-crisis world among internationally oriented businesses.

Trade slump exposes global supply chain vulnerabilities

World trade flows slumped in the first half of 2020 in tandem with the escalating Covid‑19 pandemic, which quickly spread from Asia to the Middle East, Europe, the Americas and Africa. Policies implemented worldwide as governments attempted to contain the pandemic created supply-side and demand-side shocks that were manifest in reduced production capacity, disrupted transport and logistics, and subdued final demand in most major markets and for many products. Global manufacturing output and export orders slumped, commercial flight services dwindled and shipping container throughput fell sharply through to May as governments clamped down on business activity by imposing new social distancing rules and public health protocols.

We expect the volume of world trade in goods to shrink by about 18% in 2020, while international trade volumes for goods and services are expected to fall by double digits across the Middle East. However, already there are signs of a recovery in manufacturing output, transport flows and trade volumes at a global and regional level, driven by the reopening of major economies and enormous stimulus packages in Asia, Europe, the Americas and the Middle East. Regional trade is expected to bounce back in 2021, although the lingering effects of Covid‑19 on domestic demand and global supply chains will dampen the recovery. For instance, goods and services export and import trade volumes for the Gulf Co-operation Council (GCC) states are forecast to fall by 10% in 2020 and return to growth of just 3‑4% in 2021.

Flare-ups or a second wave of Covid-19, prolonged anaemic economic growth and the imposition of new trade restrictions are major downside risk factors that could distort the much-hoped for V‑shaped recovery and make 2020 and 2021 even more troubling years for the Middle East and global value chains. Even if the shock to the system proves to be short-lived, it has been severe enough to raise important questions about the resilience of global business operations. The crisis has highlighted the need to make adjustments that mitigate the risks posed by an increasingly volatile and uncertain world, and Middle East-based enterprises are keen not to be left behind.

Adaptation rather than wholesale revolution

Middle Eastern businesses are considering options to both shorten and diversify their supply chains as ways to build greater supply chain security and resilience. An over-reliance on Asian, and especially Chinese suppliers and clients, was already a major concern and the widespread disruption to production and distribution hubs in Asia during the first half of 2020 has exacerbated these concerns. Companies in the Middle East may look to shorten their supply chains and refocus on local production wherever possible, although their options will be limited by constraints on local production skills and capacity, available investment finance and willingness to invest, and the need to retain close links with established and emerging suppliers and clients in the key Asian, European and American markets. Crucially, various countries in the Middle East are key staging posts in China’s Belt and Road Initiative and potentially large recipients of foreign direct investment and future lucrative international trade flows associated with this project, while China will remain a major consumer of the region’s energy supplies.

Infrastructure a major positive for some

Our business environment rankings (BER) model gauges the attractiveness of the business environment in some of the key economies of the region. Despite the challenges posed by the coronavirus, we expect the key Middle Eastern markets to make progress on improving its business environment in 2020‑24, and progress will be more noticeable in countries that are supported by strong scores for infrastructure, including technology, and undergoing reforms. The regional score masks substantial disparities in performance between the main economies and between the region’s best performers (UAE and Israel) and its worst (Iran).

Existing and planned infrastructure development is a major positive for some countries in the region and a comparative advantage that will help to retain their position as active participants in global value chains. Saudi Arabia, the UAE, Egypt and Turkey have well-developed international logistics infrastructure and are investing heavily to boost regional and international connectivity. Member states of the GCC are estimated to have about US$1trn of construction and transport projects under way, and a further US$1.2trn of developments planned as part of their long-term transformational masterplans, which have a specific focus on economic diversification, enhanced transport links and further movement into higher-value-adding industries. New industrial developments could aid nearshoring of supply chains, although relatively high local labour costs, lingering skills shortages and supply chain deficiencies will remain major constraints in the immediate years ahead.

Opportunity knocks

The Covid-19 pandemic has caused significant economic pain for countries in the Middle East but at the same time is creating an opportunity for growth, innovation and diversification that could benefit the region. Those countries and business sectors, or even individual enterprises, that stand a better of chance of thriving and emerging stronger from the current crisis will be better prepared, have acted pre-emptively, have a clear focus on meaningful and lasting transformation, and have the skills and capacity to implement growth strategies.

Building a stronger regional and national supplier ecosystem, trimming inefficiencies and excessive costs, investing in digital solutions, enhancing supply chain buffers, monitoring of critical supplies and collaborating more closely with key suppliers and end customers are strategies under development and in operation across the Middle East to improve and protect supply chain integrity. Middle Eastern countries and companies (international and local) are working towards a more efficient, diversified and secure supply chain environment, while at the same time are treading warily through the volatile world of geopolitics.

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