Abu Dhabi: The removal of transport fuel subsidies in the UAE may set a positive fiscal precedent for other sovereigns in the region, including those where the public finances are under more pressure, ratings agency Fitch said.

The UAE Ministry of Energy said on Wednesday that from August 1, gasoline and diesel will be linked to global prices. A fuel price committee, including Energy and Finance Ministry representatives and the CEOs of Adnoc Distribution and Emirates National Oil Company, will set prices monthly based on a review of average global prices and operating costs.

Quoting IMF calculations, Fitch said pre-tax energy subsidies in the UAE will amount to $12.64 billion, or 2.87 per cent of GDP, in 2015. The figure is 4.62 per cent of GDP for Saudi Arabia and Bahrain and for Kuwait and Qatar, it is 1.81 per cent and 1.64 per cent respectively.

“We think that governments in the region understand the benefits of subsidy reform, including both fiscal cost savings, and more efficient resource allocation and energy consumption. However, reforms have so far have been uneven and incomplete,” Fitch said in a press statement.

Negative reaction

“For example, Bahrain has focused mainly on industrial consumers and Kuwait has partly reversed diesel and kerosene price increases enacted early in 2015 in response to the negative reaction by consumers.”

Cutting or removing subsidies can be politically contentious like in Kuwait but the rating agency does not expect adverse political repercussions in Abu Dhabi, which enjoys very high GDP per capita, and good growth prospects.

“Successful implementation in the UAE while oil prices are low could increase public acceptance of subsidy reform elsewhere in the region, boosting the prospects for reform,” it said.

Oil prices have dropped by more than 50 per cent since last year due to weak demand and record oil production from the US. The prices fell from $115 (Dh422) per barrel to less than $60 per barrel this week.

Budget deficits

Lower global oil prices since 2014 have cut fuel subsidy costs, but have also reduced government revenues among Gulf oil exporters.

Fitch has forecast budget deficits of 13 per cent and 10.9 per cent of GDP for Saudi Arabia and Bahrain in 2015. Qatar will move to a small budget deficit of 0.9 per cent of GDP this year and Kuwait will post another double digit surplus though smaller than in recent years, which is about 10.6 per cent of GDP.

Francisco Quintana, head of economic research at Asiya Investments said subsidies account for about 10 per cent of GDP in the GCC, and, after Saudi Arabia, the UAE has the largest bill in GDP terms.

“With the current low oil prices, which might last for years, subsidies will become a rising problem in the region. These changes are unavoidable and the sooner the governments start the more they will be in control of the process and avoid social unrest,” he said in a statement to Gulf News.

He said energy prices will go up, but the less wealthy parts of the population can be compensated with direct transfers and the Gulf economies will become more sustainable.

“It’s a fair price to pay and we’ll see more countries doing the same.”

The UAE government will announce new fuel prices on Tuesday, March 28. Diesel prices will decrease and petrol prices will increase slightly after the announcement. The new price structure will be based on average global oil prices, officials said.