Kingdom Tower towers over Riyadh’s night skyline. Fating agency Fitch expects most GCC countries to improve their non-oil fiscal balances amid redoubled efforts towards medium-term fiscal sustainability. Image Credit: Reuters

Dubai: Fiscal balances of GCC countries will improve across in 2021 as oil prices recover to an average of $45/bbl and coronavirus-related expenditures are phased out, Fitch Ratings said in a note.

The rating agency expects most GCC countries to improve their non-oil fiscal balances amid redoubled efforts towards medium-term fiscal sustainability.

Deficits are expected to remain sizeable particularly in the lower-rated oil exporters and Kuwait, leading to continued deterioration of sovereigns’ debt and net foreign asset metrics.

“In 2021, we expect gross foreign debt issuance of around $50 billion in the GCC for new financing and rollover of maturities, including by Kuwait, assuming the government will receive new legal authorisation to borrow,” said Jan Friederich, Senior Director at Fitch.

The increase in debt issuance is expected to be accompanied by about $60 billion in drawdowns from wealth funds, and more than 40 billion in local issuance, mostly in Saudi Arabia.

Oil output and demand

The OPEC+ agreement and a tepid global demand outlook will constrain recovery in oil production in 2021. All regional oil exporters, except Qatar, have committed to limit production until April 2022, with a tapering of cuts planned for January 2021. The participating countries agreed in December 2020 to a slower taper. Oman’s medium-term fiscal adjustment strategy appears most reliant on eventual increases in oil and gas production.

Pegs resilient

Fitch expects exchange-rate pegs of the GCC unlikely to change in 2021 or in the medium term.

“In the lower-rated sovereigns, maintenance of the pegs beyond the near term will require challenging fiscal adjustment, which is underway to varying degrees, and in most cases staving off pressure on pegs will entail significant depletion of foreign assets and/or build-up of debt,” said Friederich .

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GCC countries prefer fiscal consolidation as a means of fiscal and external rebalancing, which in Fitch’s view is consistent with their structural economic limitations and their ability to defend the pegs, alone - as in Kuwait, UAE, Qatar and Saudi Arabia - or with likely external support - as in Bahrain, where it has been amply demonstrated, and Oman, where it has so far been limited.

Fiscal consolidation

Oman and Saudi Arabia stand out with ambitious fiscal-consolidation plans, in Oman’s case reflecting a weak starting position and funding pressures. Oman’s recently published medium-term reform plan includes VAT introduction in 2021, subsidy reform and the region’s first-ever personal income tax. Saudi Arabia tripled VAT in 2020 and plans an 8 per cent spending cut next year.