Is the GCC spending its way into a fiscal deficit?
High government spending, declining oil prices and low real economic growth are likely to push many oil-exporting countries from the Middle East into fiscal deficit by 2016, the International Monetary Fund (IMF) said on Tuesday.
“While most oil-exporting countries are running an aggregate fiscal surplus, already half of them, mostly outside of the GCC, cannot balance their budgets and have limited buffers against shocks. Within the GCC, Bahrain is already in deficit. Policies should, therefore, focus on strengthening budgets while minimizing the impact on growth and enhancing equity,” Masoud Ahmad, director of the IMF’s Middle East and Central Asia Department, was quoted by Gulf News.
Majority of countries in the region now need an oil price in excess of $90 (Dh330.5) to balance their budgets. The IMF sees potential fiscal deficits in all oil-exporting countries from the region, except Kuwait and the UAE, by 2015 in the absence of a drastic fiscal policy adjustment. Even a smaller decline in oil prices under plausible scenarios of slower growth in the BRICs (Brazil, Russia, India, China and South Africa) would also have a material effect on oil prices and fiscal balances of GCC oil exporters, the IMF said.
The IMF expects growth in the GCC’s state spending to slow in coming years; it forecasts an average rise of just over 4 per cent annually in 2013-2018.
The combined budget surplus of 11 Arab oil exporters is now projected to decline to 4.2 per cent of gross domestic product (GDP) in 2013 from 6.3 per cent last year. In April this year, the IMF projected a 4.7 per cent surplus for 2013.
Private sector credit growth
Domestic oil supply disruptions and lower global demand are set to reduce the aggregate growth of these economies to about 2 per cent this year after several years of strong performance. By contrast, the non-oil economy is projected to expand at a solid pace in most countries, supported by high levels of public spending and a gradual recovery of private sector credit growth.
According to the IMF forecast, a large aggregate fiscal surplus of about 4.25 per cent of GDP masks underlying vulnerabilities. Half of the region’s oil-exporting countries cannot balance their budgets and have limited buffers against shocks. Most countries are not saving enough to allow for continued spending for future generations once hydrocarbon reserves are exhausted.
Some countries have started to unwind fiscal stimulus this year; still, without further adjustment, the region’s governments will start spending from their savings by 2016. External balances are also falling because of lower oil production, rising domestic consumption and insufficient fiscal savings.