Dubai: The impact of fiscal policy responses by Gulf Cooperation Council (GCC) sovereigns to lower oil prices are likely to be small compared to the loss of revenues over 2015 and 2016, according to Fitch Ratings.
Some policy responses deployed by other oil exporting-sovereigns are harder to enact, or carry greater risks for GCC sovereigns. For example, the rating agency do not expect any change to exchange rate pegs in the region to ease fiscal adjustments. Pegs are key nominal anchors against inflation, are backed by huge reserves and receive strong political commitment, and the private sector has no experience of exchange rate volatility.
Low oil prices are having a negative impact on the GCC sovereign ratings; this is primarily because the low oil prices are causing a deterioration in their fiscal positions and in the external position.
“Countries in the GCC have suffered negative rating actions are those have low buffers compared to their peers that means either their savings are not that high or their debt is high or they have high break even oil prices,” said Paul Gamble, Senior Director, Sovereigns at Fitch Ratings.
Fitch downgraded Bahrain this year reflecting the deterioration in its budgetary position. “We put Saudi Arabia on a Negative outlook last month. In contrast we have Kuwait, Abu Dhabi and Qatar on stable outlook with no adjustments to their ratings. That reflects their very high level of savings and lower level of break even oil prices,” said Gamble.
GCC governments have taken some measures to adjust to the decline in oil prices. There have been efforts to rein in capital expenditure, but most ongoing big projects are fairly long term in nature and it will take some time to see the impact on budgets. As far as the current expenditures are concerned, the gains have been very small, according to Fich.
Efforts to boost non-oil revenues have been modest and the varying requirement for fiscal adjustment complicates pan-regional initiatives, such as plans for a GCC-wide value-added tax. Rationalisation of expenditure through better-targeted subsidies and public efficiencies is on several GCC sovereigns’ agendas, but can be hard to achieve due to spending rigidities and political opposition.
Capital spending is therefore the main overall source of adjustment among GCC sovereigns, with current projects generally continuing but fewer new projects going ahead. There are exceptions, such as Kuwait, where we expect capex to rise as the improving relationship between the government and parliament supports implementation, and Qatar, which is committed to a high level of capex until 2020, partly in preparation for the football World Cup.
Kuwait and Qatar may have more tolerance for maintaining capex in the face of lower oil prices, as they have the lowest fiscal break even oil prices among GCC sovereigns ($57 per barrel and $55 per barrel, respectively). “We forecast Kuwait to run a budget surplus in both years even with our revised average oil price (Brent) forecast of $55 per barrel for 2015 and $60 per barrel for 2016, and Qatar a small (0.6 per cent of GDP) deficit in 2015, although this rises to 5.3 per cent next year,” said Gamble.
Fitch expects Bahrain, Oman and Saudi Arabia to record double-digit deficits in 2015, although all three will benefit from some narrowing next year notably Saudi Arabia, where the rating agency projects the deficit to drop back to 8.7 per cent of GDP from 16.7 per cent, reflecting some one-off spending this year. But general government debt levels for these three sovereigns will continue to rise in 2016, as borrowing resumes or increases to help finance deficits.
