Report: GCC Enjoys a Fiscal Windfall From the Recovery in Oil Prices

Published August 13th, 2018 - 07:04 GMT
The UAE's economic outlook will be driven by the oil price and changes in fiscal policy. (Shutterstock)
The UAE's economic outlook will be driven by the oil price and changes in fiscal policy. (Shutterstock)

The UAE and Kuwait are set to return to fiscal surpluses in 2018 on the back of financial windfall from the recovery in oil prices, while Saudi Arabia should post a modest deficit, analysts said.

In contrast, Bahrain and Oman will continue to report mid to single-digit deficits, keeping their balance sheets under pressure, while Qatar gets a larger fiscal boost in 2019 due to the lag between gas revenues and oil prices, analysts at Fitch Ratings said in a report.

They said while Gulf sovereigns are enjoying a fiscal windfall from the recovery in oil prices, this will test the durability of improvements to the structure and management of public finances made in the region since the 2014 oil shock. "Pro-cyclical spending increases in some countries could leave public finances exposed when oil prices fall back, which is our baseline assumption," said the Fitch report.

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Moody's Investors Service also predicted that Kuwait would swing back into surplus in 2018 on higher oil prices, but the third largest Gulf crude producer still remains overly reliant on hydrocarbons for income. Kuwait's fiscal surplus this year will reach seven per cent of the country's gross domestic product, the rating agency said.  

Lindsay Degouve de Nuncques, head of ACCA Middle East, said the economic outlook across the Middle East and the UAE would continue to be driven mostly by the oil price and changes in fiscal policy.

"The recent Opec deal, which was agreed in late June and saw member countries agree to raise production, is likely to depress prices over the coming months. However, with VAT being introduced across the GCC [with the UAE and KSA live], it will relieve the pressure that was once felt prior to this fiscal policy being introduced, which will continue to provide economic relief and reduce further oil price dependency on economic growth," said de Nuncques.

Driven by a higher average oil price and, in most countries, increases in production after Opec+ countries agreed to boost output, all oil exporters in the Mena region will see significant improvements in their fiscal and external balances in 2018, Fitch analysts said.

"Improvements in fiscal balances are not purely mechanical. Saudi Arabia and the UAE implemented VAT and excise taxes, and other GCC countries still aim to introduce them. Domestic energy prices have been reformed to varying degrees. Governments remain committed to limiting current spending, and many have cut capital spending. These reforms are reflected in lower fiscal breakeven oil prices. Production increases in 2018 and 2019 will reduce the break-evens again," said the report.

However, the improvement in break-even prices and non-oil primary balances is levelling off as a more benign fiscal environment prompts increased spending in response to social and economic concerns, and a slowdown of politically challenging reforms.
Abu Dhabi's recent Dh50 billion economic stimulus programme will have limited sovereign credit impact given the sovereign's strong balance sheet and low fiscal break-even oil price, Fitch said.

Abu Dhabi's fiscal break-even oil price is among the lowest for Fitch-rated oil producers, estimated at slightly above $60/bbl, and its fiscal and external positions are among the strongest, with sovereign net foreign assets estimated at 281 per cent of GDP last year, and government debt at just eight per cent of GDP.

As such, spending the budgetary windfall created by higher oil prices should have a limited impact on key metrics. Fitch has increased its oil price forecasts to $70/bbl for 2018 and $65/bbl for 2019, from $57.5/bbl for both years. "Under these new forecasts, and assuming the gradual ramp-up of stimulus spending, we now expect budget surpluses of 3.2 per cent of GDP in 2018 and 0.9 per cent in 2019, from an estimated deficit of 3.2 per cent of GDP in 2017. These figures include the estimated investment income of the Abu Dhabi Investment Authority."

Alongside higher oil prices, the stimulus package will support Abu Dhabi's growth recovery. "We expect non-oil growth of 3.5 per cent in 2018 and 4 per cent in 2019, from 1.8 per cent in 2017. The reforms of the type outlined would further support improvements in the business environment, giving some boost to non-oil growth and diversification over time, but Abu Dhabi's economy will remain highly reliant on hydrocarbon production and government spending for the foreseeable future.

By Issac John


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