Dubai: The GCC countries facing huge shortfall in oil revenues as a result of sharp decline in oil prices over the past two years are fast adjusting to the new realities, according to Washington based Institute of International Finance (IIF) an association of more than 500 leading global financial institutions.
The relatively low public debt ratios, large financial buffers, and the sizeable fiscal consolidation being planned, combined with a modest recovery in global oil prices, should put fiscal positions on a more sustainable footing in the GCC countries, the IIF said a new report ahead of the International Monetary Fund’s regional Economic Outlook that will be published on April 25.
“GCC growth is expected to slow further to 2.2 per cent this year, from 3.1 per cent in 2015” said Dr. Garbis Iradian, chief economist for Middle East and North Africa at the IIF. “Most MENA oil exporters are responding to a sharp deterioration in fiscal accounts and the likelihood of sustained low oil prices by launching much-needed fiscal reforms. Additional cuts in spending and mobilisation of non-oil revenues are likely in the coming years. With average oil prices expected to be below 2015 levels, fiscal deficits are expected to rise somewhat further in 2016, but they should be manageable.”
Consolidated government spending was cut by 14 per cent in real terms in 2015 compared to an average annual increase of 8 per cent in 2003-2014. The IIF expects a further 11 per cent cut this year. Public investment has borne the brunt of the fiscal consolidation as low-priority projects have been cancelled. In addition, subsidies are being reduced or eliminated, and the wage bill is being contained. With the further decline in expenditure in 2016, and assuming a freezing of the level of spending thereafter in real terms, the ratio of government expenditure to non-oil GDP is projected to decline steadily to 41 per cent by 2020.
Fiscal adjustment is also underway through mobilisation of additional non-oil revenue. The authorities are raising fees for public services, and a value added tax (VAT) is expected to be introduced in early 2018 in all GCC. Also, the authorities plan to privatise a range of public sector assets. The significant cut in spending has reduced fiscal break even oil prices in all countries. The weighted average fiscal break even price of oil for the MENA oil exporters is expected to decline steadily from a peak of $93 per barrel in 2014 to $62 per barrel by 2017.
Notwithstanding the consolidation efforts, the fiscal balance is expected to remain in a large deficit of $236 billion (10.5 per cent of GDP) in 2016, the largest deficit in the history of the region. Lower oil revenues will more than offset the projected 10 per cent decrease in real spending. While public foreign assets including reserves and sovereign wealth funds are large and are sufficient to finance the deficits at least for the next few years, a number of countries are increasingly turning to international debt markets.
While public foreign assets will continue to decline, albeit from very high levels, import cover will remain well above 30 months through 2020, or 105 per cent of gross domestic product (GDP).
“The sizeable fiscal consolidation efforts should put the fiscal stance on a more sustainable footing in the medium term provided that oil prices recover gradually to $60 per barrel by 2025, as assumed in our baseline scenario. Our projections show that the consolidated fiscal deficit would narrow steadily to about 1 per cent of GDP by 2025 and the public debt would peak at 48 per cent of GDP in 2020 and then broadly stabilise,” said Giyas Gökkent, Senior Economist, Africa Middle East, IIF.
