Dubai: With another bout of extreme volatility witnessed in oil prices, countries in the Gulf Cooperation Council may continue to post budget deficits for a few more years, forcing them to raise more debt, until stability returns to oil market.
“We expect all of the large rated GCC economies, except Kuwait, to post general government deficits in 2015 and 2016,” Trevor Cullinan, Director and sovereign analyst with Standard & Poor’s told Gulf News.
Most of the countries in the GCC are already in deficit, following a more than 60 per cent decline in prices of oil, from which it derives most of its revenues.
However, the most likely hit could be Saudi Arabia, which is the largest exporter of oil. Lower oil prices and increased spending are forecast to widen the general government deficit to 14.4 per cent of GDP in 2015, according to Fitch ratings.
“Saudi Arabia is having a more expansionary fiscal policy in 2015, however, is likely to see a sharper adjustments going forward,” Monica Malik, chief economist at Abu Dhabi Commercial Bank told Gulf News.
The policy response has been limited and primarily consists of a reduction in capital spending that will take time to gain traction. Deficits in the mid-single digits are forecast for 2016 and 2017, assuming reduced capital spending, the absence of new one-off outlays and a gradual recovery in oil prices.
“Deficits would likely stay in double digits if there was no consolidation. Transparency on fiscal policy and out-turns is a weakness relative to rating peers,” Fitch Ratings said.
To bridge the widening gap, Saudi Arabia raised $5.33 billion through debt earlier this month, and plans to raise billions more to maintain its spending plans.
“In the first instance it seems that GCC governments are running down their assets in order to pay for burgeoning fiscal deficits. However, in order to diversify funding sources, build debt capital markets and to slow the depletion of their asset positions, the governments may also look to domestic debt issuance, as has happened in Saudi Arabia,” Cullinan said.
“GCC sovereigns may at some point also look to debt issuance in the international capital markets,” he added.
As a part of Saudi’s measure to diversify from oil, the biggest economy in the GCC, also opened its $500 billion strong equities market to foreigners to attract more international funds.
But despite that, S&P expects GDP growth of 2.5 per cent in Saudi Arabia in 2015, down from 3.6 per cent in 2014.
“We view Saudi Arabia’s economy as undiversified and vulnerable to the steep and potentially sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth,” Cullinan said.
Saudi Arabia derives about 40 per cent of its GDP, 90 per cent of government revenues, and 85 per cent of exports from the hydrocarbons sector.
Proactive UAE
“UAE has showed a proactive stance to the lower oil price by introducing a number of fiscal reforms measures. Official comments point to further reforms, including on the taxation side. The fiscal adjustment has been relatively gradually, thereby balancing them with the growth outlook,” Malik said.
UAE took a proactive step of removing the subsidy on gasoline, a move that could save the emirate $12.64 billion, or 2.87 per cent of GDP, in 2015.
Qatar on the other hand also faces medium-term risks. Externally, it has limited potential for gas revenues to rise, with production flat from 2018 and further downside risks to the price on the back of rising global supply.
While hydrocarbon output growth in nominal terms is expected to contract sharply on the back of the substantially lower energy prices, the country is expected to face relatively weaker contraction in nominal GDP compared to the other GCC countries due to Qatar’s long-term gas agreements.
“With the medium-term outlook for oil remaining weak, GCC countries will have to adopt a tighter fiscal policy. There are also indications that the lower oil price is resulting in a more cautious approach by the private sector, which will likely result in weaker spending and investment as well,” Malik said.
