Dubai: Oil price recovery will result in big gains in terms of government revenues for key GCC countries such as Saudi Arabia, UAE, Kuwait and Qatar, according to Institute of International Finance (IIF), a Washington based association of global financial institutions.
GCC’s aggregate current account surplus is projected to witness more than fivefold growth in 2021 to $109 billion from $20 billion in 2020.
The IIF has projected GCC’s hydrocarbon revenue to increase from $221 billion in 2020 to $326 billion in 2021.
“Our calculations show that for every $10/bbl in-crease in oil prices, hydrocarbon exports would increase by $40 billion in Saudi Arabia and $12 billion in the UAE,” said Garbis Iradian, Chief Economist, IIF MENA.
A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation.
Capital inflows
Non-resident capital inflows into GCC are projected to increase from $123 billion in 2020 to $148 billion in 2021 despite the lower financing needs by the sovereign, as the fiscal deficits narrow substantially.
Corporate issuance, including government related entities (GREs) to finance existing loans and bonds that mature in 2021 will remain sizeable. So far this year, the GCC has raised a combined $95 billion in the international market. GCC Eurobond issuance peaked at $111 billion in 2020 and was dominated by sovereigns and quasi-sovereigns.
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.
Fiscal consolidation
The 2021 budgets of GCC states have accounted for significant consolidation in terms of spending cuts and additional revenue augmentation through tax reforms. While governments have either reduced or postponed spending and in some cases re-prioritised spending by cutting non-essential investemnts.
According to IIF estimates with Brent oil prices averaging $67/bbl and modest fiscal consolidation, the aggregated fiscal deficit to narrow from 8.5 per cent of GDP in 2020 to around 1 per cent 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 a sizeable improvement in non-hydrocarbon revenue and restrained public spending, the fiscal breakeven oil prices will decline, particularly in Saudi Arabia and Oman.
Banking sector resilience
The financial soundness indicators as of December 2020 suggest that the banking systems remained resilient amid the pandemic, helped by sound initial capital and liquidity positions. Tier 1 capital ratios exceeded 15 per cent in the six GCC countries.
Non-performing loans (NPLs) to total loans were between 2 and 3 per cent in Saudi Arabia, Qatar, and Kuwait, and 4-8 per cent in Oman, Bah-rain, and the UAE. Central banks in the region extended the deferred payment programme until the end of June to support private sector financing.
“Once the forbearance is lifted, we could see a modest deterioration in asset quality. Profitability challenges in the low-interest rate environment may also limit banks’ ability or willingness to expand private sector credit at the same pace as in 2020,” said Iradian.
