The steady decline in oil prices, and with no end in sight, is bad news for the Gulf states’ fiscal regimes. The bloc has traditionally been on the conservative side in preparing annual budget forecasts and particularly in the way they forecast oil prices.
This allowed them to post handsome budget surpluses because oil prices were invariably higher than the forecasts. This is what is being put to the test in the coming months with the current lower bound tendency of oil prices.
This sector is exceptionally vital for the well-being of GCC economies on the back of constituting about three-quarters of treasury revenues and exports and one-third of gross domestic product (GDP).
In 2013, all GCC countries except for Bahrain enjoyed lavish budgetary surpluses on the back of firm oil prices. Looking back, Bahrain reported a budgetary shortage of $1.1 billion in fiscal year 2013 while assuming $90 a barrel. The IMF had stressed that Bahrain needs a price of $119 a barrel in order to achieve equilibrium in its budget, and clearly something not attainable in current market conditions.
The budget of Saudi Arabia, in turn the largest among GCC and Arab countries, enjoyed a surplus of $55 billion (Dh202 billion) in 2013, almost half of that achieved in 2012. The sharp drop reflected stronger spending on housing projects and socioeconomic priorities, notably the challenge to create jobs among the youths.
By one account, the equilibrium oil price for the Saudi budget this year was $90 a barrel, which is the level below market prices nowadays. Certainly, Saudi officials can rely on the country’s massive sovereign wealth fund (SWF) of $750 billion to address fiscal deficit. To be sure, the Saudi SWF, which serves as a cushion if and when needed, is one of the highest in the world and behind those of Norway and the UAE.
Qatar had an surplus of $17 billion in fiscal year 2013-14, or 9 per cent of the country’s GDP while assuming an oil price of $65 per barrel. Interestingly, the budget makers assumed a similar price in the 2014-15 budget, though in different circumstances.
The original forecast calls for a shortage of $2 billion for the fiscal year ending March 2015, therefore the possibility of the eventual figure being in the red cannot be ruled out. The other option for Qatari authorities would be to curtail spending, though not possible as the country prepares to host World Cup 2022. Qatar is said to have plans for investing as much as $200 billion on an array of projects ahead of the sporting event.
Kuwait prepared its budget for fiscal year 2014-15 using an average oil price of $75 per barrel, with a projected shortage of $5.6 billion or 3 per cent of GDP. In reality, Kuwait has a history of reporting extraordinary budgetary surpluses, through the familiar formula of stronger revenues and lower expenditures. But this could undergo a real test in the next few months.
Oman prepared its 2014 budget by assuming an average price of $85 a barrel, and therefore a shortage of $4.7 billion. It is suggested Oman’s budget requires an equilibrium price of $100 per barrel.
In totality, the final results for fiscal year 2014 could bring some disturbing news due to steady decline in oil prices, reaching way below the level of $90 per barrel for the first time since 2010 and with warnings of further drops. Still, the full effect may not be realised by year-end, as the fiscal year in two of the states — Qatar and Kuwait — ends in March.
