GCC sovereigns likely to take action to cut deficits, says Moody’s

GCC governments will take action to tackle budget deficits as oil prices are likely to remain lower longer than initially forecast, according to the ratings agency Moody’s.

In a new report, Moody’s states that growth has cooled across the region, leading to weaker fiscal balances as oil prices are set to remain sluggish until at least 2017, with a US$55 per barrel target for Brent forecast for this year, $53 next year and $63 in 2017.

Already this has had a drag on economic performance, with Moody’s predicting a 24 per cent decline in nominal GDP for Kuwait this year and a 14 per cent drop in nominal GDP in Saudi Arabia, although real GDP growth in the kingdom although real GDP in the kingdom is expected to grow by 2.8 per cent. The share of GDP contributed by the Saudi oil sector is also set to decline from 47 per cent in recent years to just 35 per cent this year.

Moody’s states that the kingdom is facing a fiscal deficit of 17 per cent this year. Oman (12 per cent) and Bahrain (11.5 per cent) are also facing sizeable deficits, while the UAE is predicted to have a budget deficit of 4.1 per cent this year and 2 per cent in 2016.

Kuwait, which has a lower fiscal break-even oil price point, and Qatar are expected to record surpluses of 1.4 and 0.6 per cent respectively this year, but even the latter faces a deficit of about 7 per cent next year owing to the lag in LNG contract prices behind oil prices.

Steffen Dyck, a senior analyst at Moody’s, said that he expects to see “more action on the fiscal policy front” next year. 

“I think what we will probably see is a more coordinated move … that all countries in the GCC will do some reform, be it on the expenditure side or on the revenue side,” he said. 

“We don’t think there will be a big bang reform in terms of introducing GCC-wide VAT, but we have seen in the UAE that they have taken a bold move in reforming the subsidy for retail fuel, and I think others will follow in 2016.

“We cannot really precisely forecast what the measures will be, but on the revenue side I think it’s likely that they will try to raise revenues from existing fees and taxes, and on the expenditure side, further rationalisation of subsidies.” The report also said that external debt ratios remain low, but that it expects more external borrowing by governments in Bahrain, Oman and Saudi Arabia.

Bahrain’s debt-to-GDP ratio is set to reach 70 per cent by the end of next year, while that of Oman may hit 20 per cent. Saudi Arabia’s is likely to reach 12 per cent, which is still low but a marked increase from the 2 per cent it stood at last year.

A new report by Credit Agricole Private Banking, meanwhile, argues that the UAE and Saudi Arabia continue to experience stable economic activity despite the challenges provided by lower oil prices and geopolitical events.

The company’s chief economist, Paul Wetterwald, said that the economies in both countries “continue to move ahead”.

Mr Wetterwald said: “Oil price-related negativity has not actually translated into any meaningful or weaker economic activity in the UAE or Saudi Arabia.” He also pointed out that despite some pressure being placed on forward rates of the Saudi riyal, the kingdom’s monetary authorities had reaffirmed their commitment to keep the currency’s peg with the US dollar.


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