GCC purse-tightening to persist for the long haul: Analysts

Published January 19th, 2017 - 12:00 GMT
Only the UAE and Kuwait are set to post surpluses by 2021, and analysts expect all GCC countries to remain in deficit in 2017. (File photo)
Only the UAE and Kuwait are set to post surpluses by 2021, and analysts expect all GCC countries to remain in deficit in 2017. (File photo)

Despite significant deficit-reduction efforts under way since 2015 in the backdrop of plunging oil revenues, all GCC countries are projected to record fiscal deficits in 2017 while making substantial budgetary cuts.

Analysts expect most GCC states to press ahead with substantial budgetary cuts from 30 per cent upwards in order to maintain balanced budgets regardless of signs of a gradual recovery in oil prices following the recent agreement among oil exporters to cut output.

Across the GCC, government financial assets have been drawn down as part of the deficit financing programmed over the past two years. After a significant withdrawal of financial assets in 2015, a larger portion of the 2016 fiscal deficits that amounted to about $193 billion was covered by issuing debt, analysts pointed out.

Bahrain, Oman, Qatar, Saudi Arabia, and the UAE have issued bonds and obtained syndicated loans in international markets this year.

In a market overview, Value Partners analysts point out that while oil price drop has largely impacted GCC public finances and has hampered foreign direct investment, only the UAE has been capable to retrieve FDI to pre-crisis level with an increase of 117 per cent in 2015 compared to 2008.

The report forecast that GDP growth in the GCC countries would be at 2.3 per cent in 2017, far from the growth experienced in the past. "Oil price is the main driver of the GCC economy and it is expected to remain around $51 in 2017. However, the forecast may be affected by a number of factors, including the increasing global oil production, uncertain consumption patterns and investments in the oil industry," it said.

Fitch Ratings has forecast an oil price scenario of an average $45 per barrel in 2017 and $55 per barrel in 2018 for both Brent and WTI in the backdrop of high inventories and the potential for US shale production to respond quickly to any market tightening.

While only the UAE and Kuwait are set to post surpluses by 2021, analysts expect all GCC countries to remain in deficit in 2017 (-6.9 per cent) and caution that the rigidity of public expenses would lead to further challenges requiring actions to focus investments in the private sector, facilitate the proliferation of SMEs and improve the banking system in terms of liquidity and solvency.

ICAEW's forecast said that as one of the most diversified economies in the Gulf, the UAE will witness an overall GDP growth of 2.3 per cent this year, rising to 2.7 per cent in 2017 as both oil and non-oil sectors improve.

"Output in the oil and gas sector, which makes up around one-third of the economy, is estimated to have risen by only one per cent in 2016 after growing five per cent in 2015. Non-oil growth is also estimated to slow a little further to 2.9 per cent as the cumulative impact of low oil prices, tighter fiscal policy and liquidity feeds through."

According to ICAEW, the UAE and Qatar are better-placed than other oil exporting Gulf countries to withstand a persistent oil price slump amid bleaker outlook with a projected 2016 breakeven prices - at which oil must sell in order to balance the budget - at $57 and $44 per barrel respectively.

While breakeven prices for Kuwait and Saudi Arabia are projected at $60 and $77 per barrel respectively, Oman and Bahrain will be under the greatest pressure with breakeven prices at $104 and $97 per barrel respectively, ICAEW said while urging GCC countries to substantially raise non-oil government revenues.

Analysts at the chartered accountants organisation said businesses in the GCC to brace for long-term efforts by governments to close fiscal deficits and raise much more substantial revenues from the non-oil economy, as well as implement other offsetting populist policies like the drive to increase the national share of the workforce, especially in the private sector.

They warned that this could place many pressures on businesses, including higher labour costs, weaker consumer demand, and the loss of retained earnings for investment.

"To ensure that the adjustment in public finances is consistent with ongoing growth, businesses should make the case for accompanying measures that will allow tax increases to be absorbed with minimal impact on activity. Offsetting measures could include welfare reforms to incentivise more citizens to compete for jobs with migrants, more flexibility to negotiate wages, and deductions from profit taxes to protect investment spending," ICAEW report said.

By Isaac John


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