Dubai: All GCC countries are highly dependent on oil revenues, with public spending from this source driving much of the economic activity. Thus, the decline in oil prices will have varying levels of impact on these economies depending on their level of oil dependence, Thomas Byrne, Senior Vice-President of Moody’s said in Dubai.

“We expect the downside effects of the lower oil prices projected for 2015 and 2016 to be moderated by the policy response of GCC governments, which will likely opt to stimulate their economies through continued public spending. This will be likely achieved by increasing government borrowings and by drawing from their sizable sovereign reserves,” said Byrne.

Moody’s central assumption is that oil prices will average $55 per barrel (for Brent) in 2015, rising to $65 on average in 2016 and gradually rise to $77 by 2019, assuming inventories will diminish gradually.

For GCC oil exporters, the main impact from lower oil prices will be on governments’ fiscal accounts and external balances, with the degree of resilience to lower oil prices varying. “We see three groups, which, from strongest to weakest, consist of: First, Kuwait and Qatar; second, the UAE and Saudi Arabia; and Oman and Bahrain.

Kuwait and Qatar rank highest in resilience with stronger fiscal positions, as reflected by their relatively low fiscal breakeven prices and large reserves. Nevertheless, both have taken measures to limit expenditures, underlining the fiscal flexibility provided by their large amounts of oil receipts per capita, and both have based their prospective budget on a comparatively low oil price of $45 per barrel.

At the end of January, Kuwait presented a draft budget that includes the largest spending cut among all GCC countries, at 17.7 per cent. Qatar has a higher fiscal breakeven oil price than Kuwait, reflecting a large ramp-up in capital expenditures over the past few years, and the country’s fiscal accounts are expected to be broadly balanced.

Saudi Arabia and the UAE, with their large reserves, are expected to weather the squeeze caused by the oil decline.

“Saudi Arabia and the UAE will likely tap their reserves. The increases in some announced budgets over the previous year budgets often show budget-to-budget increases. However, compared to actual spending in 2014, we expect general government expenditure to decline in nominal terms in the GCC, with the exception of the UAE,” said Byrne.

Moody’s expects debt levels in Bahrain and Oman to rise quickly compared to GCC peers. Oman’s budget for 2015 is based on an oil price of $75 per barrel and envisages a deficit of 8 per cent of GDP. The deficit will be financed by a combination of asset sales and debt issuance.

Bahrain has not yet published its budget for the two years ahead. But it has implemented a series of reforms destined to reduce the cost of subsidies, which among other things will lead to a rise in gas prices for industrial users.

The UAE’s federal budget announced in October envisages a 6.7 per cent increase in expenditures compared to the 2014 budget.

Saudi Arabia announced its budget in late December, based on an average price of $60 per barrel in 2015, and indicating a 0.6 per cent increase in overall expenditures.

Moody’s expects that the counter-cyclical fiscal measures taken by these countries will support GDP growth over the near term.