Time to face the fundemantals: GCC economies need fiscal reform to handle oil price volatility
The expenditure adjustments in the GCC countries as policy response to oil price decline are expected to vary depending on the relative fiscal health of individual countries .
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Oil revenues are critical to Gulf Cooperation Council (GCC) to sustain public expenditures and economic growth; however the impact of recent sharp decline in oil prices can be managed with diligent use of accumulated surpluses and innovative fiscal management, economists and policy experts said.
Speaking at a policy symposium on developments in the global oil markets and their effects on the region’s economies, policy experts and economists said the GCC countries are not new to volatility in the oil market and this time most of these economies are better equipped to deal with the impact of oil market glut and sharp decline in prices.
“Most of the GCC countries have accumulated large surpluses during the boom years and have invested in critical infrastructure. While these countries can use the surpluses to fill the revenue gap from oil price decline, most of these countries have very low debt to GDP ratios, giving them ample fiscal head room to leverage,” said V Shankar, Group Executive Director and CEO of Europe Middle East, Africa and America of Standard Chartered.
While the current oil prices are below most GCC countries’ fiscal break-even point, governments generally have the resources to help mitigate the immediate impact and maintain a supportive operating environment for economies.
Although, a prolonged period of depressed oil prices would reduce surpluses, weaken investor confidence and economic activity and exert pressure on the GCC governments to rationalise expenses, experts said the region is capable of dealing with such a scenario, although different governments will opt for different policy tools.
Experts said among the GCC countries Kuwait and Qatar are the most resilient, given their relatively low fiscal and external break-even oil prices and large reserve buffers. Saudi Arabia and the UAE exhibit slightly weaker fiscal fundamentals and higher external break-even oil prices than Kuwait and Qatar. However, all four countries have similar shock absorption capacities, given Saudi Arabia’s and the UAE’s large non-oil sectors and sizeable reserves.
“While the reserves of Kuwait, the UAE, Qatar and Saudi Arabia can cover multiple years’ worth of government expenditures, Bahrain’s and Oman’s do not provide that level of cover,” said Marios Maratheftis, Global Head of Research at Standard Chartered Bank.
The expenditure adjustments in the GCC countries as policy response to oil price decline are expected to vary depending on the relative fiscal health of individual countries.
“Curtailing non-strategic investment projects would likely be the first step, followed by a slowing in the growth or even contraction of current government spending. Some GCC countries have mentioned the need for subsidy reforms, and some have already started to act,” said Yousuf Hamed Al Ebrahim, Advisor, Al Diwan Al Amir, Kuwait.
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