GCC’s budget deficits to narrow and current accounts to turn surpluses in 2021
Budget breakeven oil prices to shrink significantly on spending cuts and higer revenues
Dubai: Spending cuts and efforts to augment non-oil government revenues across the GCC will bring down budget deficits significantly in 2021 according to the Institute of International Finance (IIF), a Washington headquartered association of global financial institutions.
The fiscal consolidation efforts along with higher oil prices are expected to reduce the budget breakeven oil prices [the minum oil price required to balance government revenue and expenditure] of most GCC countries.
Under our assumption of Brent oil prices averaging $60/bbl and modest fiscal consolidation, we expect the aggregated fiscal deficit to narrow from 9.1 per cent of GDP in 2020 to 1.2 per cent in 2021.
The planned fiscal adjustments across the GCC relies mainly on improvement in nonhydrocarbon revenues through tax reforms in Saudi Arabia and Oman and reprioritisation of spending, including cuts in nonessential investment projects across Saudi Arabia, Oman, and Qatar.
Lower deficits
The spending cuts and higher non-oil government revenues will help GCC countries to reduce their budget deficits. The IIF expects, the planned fiscal consolidation on conservative forecast of oil prices in the range $40 to $45 a barrel and the significant jump in oil prices in recent months will result in drastic reduction in fiscal deficits of GCC countries in 2021.
“Under our assumption of Brent oil prices averaging $60/bbl and modest fiscal consolidation, we expect the aggregated fiscal deficit to narrow from 9.1 per cent of GDP in 2020 to 1.2 per cent in 2021,” said Garbis Iradian, Chief Economist MENA of the IIF.
“We project an increase in hydrocarbon revenue from $200 billion in 2020 to $340 billion in 2021.”
The announced plans for fiscal adjustment in the coming years in Saudi Arabia, the UAE, Oman, and Qatar will put the fiscal position on sound footing over the medium-term even if oil prices resume their decline beyond 2021. Stronger adjustment is needed in Bahrain to achieve fiscal sustainability.
“With the sizeable improvement in nonhydrocarbon revenue and restrained public spending, the fiscal breakeven oil prices will decline, particularly in Saudi Arabia and Oman,” said Iradian.
According to the IIF estimates, Saudi Arabia, Qatar, and the UAE, with large public foreign assets, are better placed to accommodate additional spending on social sectors than Bahrain and Oman.
Current accounts
The IIF expects the aggregated current account balance of GCC to shift from a deficit of $23 billion in 2020 to a surplus of $64 billion in 2021.
Non-resident capital inflows will remain elevated at $138 billion in 2021 despite the lower financing needs by the sovereign, as the fiscal deficits narrow substantially. Corporate issuance, including GREs to finance existing loans and bonds that mature in 2021 will remain sizeable. So far this year, the region has raised a combined $28 billion in the international market, of which $15 billion is related to the revolving credit facility of the PIF [Public Investment Fund, the sovereign wealth fund of Saudi Arabia] with a group of 17 international banks.
Bahrain and Oman each raised $2 billion in Eurobond sale. GCC Eurobond issuance peaked at $111 billion in 2020 and was dominated by sovereigns and quasi-sovereigns.
The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. In a current account surplus situation the value of a country’s exports exceeds the value of its imports, indicating that the country is a net lender to the rest of the world.
A country’s balance of payments has two components, namely current account and capital account. The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments.
Supportive monetary policy
Monetary policy will remain accommodative as central banks in the region track the monetary policy of the US in the context of the peg to the US dollar. Last week the US Federal Reserve confirmed that it intends to keep the policy rates near zero until 2024.
Following the pandemic, Central banks in the region lowered their policy rates by 1.25 percentage points to 0.5 per cent and have introduced liquidity support measures to support the private sector, particularly SMEs, by allowing them to defer payments on existing loans and increase lending to businesses. The IIF expects lower rates and supportive policy measures to help faster post-COVID recovery in the non-oil sectors.