Tax reform or burning buffers? GCC approaches to the oil price slump

Published October 20th, 2015 - 12:35 GMT

The decline in oil prices since mid-2014 has hurt economic growth and weakened fiscal and current account balances in all six GCC countries. While fiscal reforms including taxation and subsidy reforms can bolster revenues, according to Credit rating agency Moody’s.

Moody’s expect oil prices to stay lower for longer. It projects a slower rebound in oil prices, with Brent crude averaging $55 (Dh202) per barrel in 2015, $57 in 2016 and increasing gradually in 2017 to $65.

Fiscal, external balances have weakened growth in the GCC has fallen in line with the slowdown in global oil prices. Aggregate nominal hydrocarbon GDP for GCC member states dropped 11 per cent between 2012 and 2014. The aggregated fiscal surplus declined to 4 per cent, from around 14 per cent of regional GDP, while the combined current account surplus slipped to 14 per cent of GDP from almost 25.

“Persistently low oil prices could spur policy adjustments. Governments could take steps in 2016 to reduce subsidy spending and enhance revenues, among other measures. But fiscal balances will be much weaker than they were before 2014, increasing the need for financing and meaning that debt issuance volumes are likely to increase,” said Steffen Dyck, senior analyst at Moody’s.

Moody’s said tax reforms would increase revenues against a backdrop of falling income from exports and from taxes on oil and gas activity.

Since 2009, GCC governments have been considering the uniform implementation of a Value Added Tax (VAT) However, agreement on a timeline remains elusive.

The UAE has made the most progress in considering the implementation of VAT. While the government has not yet revealed a proposed tax rate, the IMF has recommended a 5 per cent VAT, which it estimates would produce income worth 2.7 per cent of non-hydrocarbon GDP.

Other GCC countries such as Oman, Bahrain and Kuwait too are considering VAT along with other revenue enhancement measures, which could include additional taxes on foreign labour, and privatisation of government-owned companies.

“Qatar and Saudi Arabia are also exploring the introduction of a VAT. However, we do not expect substantive progress, given the lower urgency for these sovereigns, which have ample fiscal buffers to withstand the oil price shock,” said Mathias Angonin, an analyst at Moody’s.

GCC governments are taking different avenues to fund budget shortfalls. Kuwait, Qatar and Saudi Arabia face less pressure to implement fiscal consolidation measures given their large reserves and low debt levels.

Bahrain, Qatar and Saudi Arabia are now putting their buffers to use. Conversely, reserves have remained broadly stable in the case of Kuwait and the UAE, and even increased in Oman.

During the first half of the year, Saudi Arabia drew on its foreign reserves to sustain government spending amid its oil revenue shortfall. Reserves fell to under $665 billion in August 2015, from a high of about $746 billion in August 2014.

Its Qatari counterpart, the Qatar Investment Authority, was estimated to have assets of $256 billion as of end-2014, according to the Sovereign Wealth Fund Institute. In Bahrain, reserves fell by 15 per cent to $5.2 billion in April from $6 billion in December but have risen again slightly in May and stabilised since then. Oman’s official foreign reserves stood at $19.2 billion as of July, up from $16.3 billion in December 2014.

According to Moody’s, the Abu Dhabi government, which supports the UAE federal budget, has ample fiscal reserves in the Abu Dhabi Investment Authority, estimated at around 120 per cent of the UAE’s GDP as of end-2014.

By Babu Das Augustine

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