Dubai: Reforms undertaken by GCC countries since 2014 have slowed the fiscal deterioration caused by lower oil prices, but progress has been slow and uneven, according to global credit rating agency Moody’s.
Going forward, the rating agency’s analysts expect GCC governments to increase spending and delay unpopular austerity measures, resulting in higher debt accumulation in a moderate oil price environment.
“Lower oil prices since 2014 have significantly weakened GCC sovereigns’ public finances,” said Alexander Perjessy, a Moody’s Vice-President — Senior Analyst and the report’s co-author. “The implementation of fiscal consolidation measures and reforms has been uneven across the six GCC sovereigns and has so far been more concentrated on the expenditure side.”
In 2015-18, all GCC sovereigns undertook spending rationalisation exercises, and — although less significant — most delivered some form of energy price reforms and introduced new non-oil revenue measures.
Although policy measures have slowed fiscal deterioration linked to lower oil prices in the GCC, most GCC sovereigns will continue to run fiscal deficits and accumulate debt if prices remain moderate as expected, according to Moody’s.
Reductions in current spending have been more gradual, reflecting a combination of subsidy cuts (either through one-off increases in prices and tariffs and/or through adopting semi-automatic price adjustment mechanisms linked to the international price of crude oil), government spending rationalisation and civil servant wage and hiring freezes.
“Most GCC countries have recently begun to reverse these cuts, with total government spending across the GCC rising by around 10 per cent in 2018,” said Perjessy.
Moody’s does not anticipate that the governments’ wage bills, which account for a significant portion of total spending, will decline significantly in the medium-term. Meanwhile, progress on revenue side measures has been slow and much less material, adding relatively little to government’s overall revenue intake.
Only three of the six GCC sovereigns — Saudi Arabia, the UAE and Bahrain — have so far implemented the 5 per cent value-added tax that in 2016 all the GCC countries agreed to implement during 2018. Bahrain launched the tax in January 2019 as part of the Fiscal Balance Programme, which was announced in September 2018, while Oman may implement the measure in 2020.
Moody’s analyst expect most GCC sovereigns to continue to run fiscal deficits and accumulate debt if oil prices remain moderate. While fiscal break-even oil prices have generally declined since 2014, they have fallen by less than required to balance the governments’ budgets. In 2019-20 Moody’s expects the largest fiscal deficits in Oman and Kuwait.
“Higher spending and limited non-oil revenue increases in a moderate oil price environment is expected to see debt burdens continuing to rise for most GCC sovereigns, putting additional upward pressure on interest bills. This will further slow the overall fiscal consolidation momentum. However, some degree of protection will be afforded for most GCC countries by fiscal buffers accumulated in sovereign wealth funds and by some scope for privatising government assets,” said Perjessy.