Sunday, Nov 15, 2015
Dubai: GCC governments will be forced to scale down spending and seek new and innovative ways to augment revenues in the context of sustained fall in oil prices, according to the Institute of International Finance (IIF), the Washington based association of more than 500 banks and financial institutions.
The IIF expects oil prices to hover around $50-60 (Dh184-Dh220) range for the next 3 to 4 years, far below the current budget break even prices, forcing many to shrink their budgets and seek additional revenues.
Although some of the Gulf States such as Saudi Arabia, Kuwait, the UAE and Qatar huge reserves to support their current spending programmes for a few years, in the absence of fiscal discipline, the IIF expects these countries to run out of reserves in less than five years.
“The sharp and sustained decline in oil prices makes fiscal adjustment unavoidable. But with the some GCC governments holding substantial reserves including the reserves held by sovereign wealth funds, in the short to medium term these governments do not face major challenges,” said Dr Garbis Iradian, chief economist for Middle East and North Africa at the IIF.
But with oil prices projected remain depressed over a long period of time; the IIF said the GCC governments need to make significant fiscal adjustments to cope with the sustained fall in revenues.
Diversification efforts
“Some restraint in spending is necessary in countries such as Saudi Arabia, Oman and Bahrain where fiscal deficits are seen rising. In Saudi, historically, policy response has been to cut capital expenditure. But such spending cuts are going to hurt economic diversification efforts and overall efficiency in the economy,” said Giyas Gokkent, senior economist, Africa Middle East at IIF.
Cuts in government spending are expected to hurt the over all economic growth particularly non-oil private sector growth. “We expect aggregate government spending to decline by an annual average of 2 per cent in 2015-16 compared to a 15.5 per cent annual average increase from 2004 to 2014. Tighter fiscal stances will lead to weaker growth in the GCC. Non-oil growth is expected to weaken to 2.6 per cent in 2016 from 3.9 per cent in 2015,” said Dr Iradian.
The IIF expects the banking systems in the region to cope well with low oil prices in the next few years although liquidity conditions are tightening and the interest rates rising. However it expects a weakening of asset quality and profitability if the oil price slump persists over a long period of time.
At the current oil prices the UAE’s GDP growth is projected to moderate to 3 per cent in 2015 and 2016. “Reductions in energy and electricity subsidies and non-priority spending are leading to a significant decline in government spending. While the UAE’s large current account surplus is projected to decline it will remain sizeable and the UAE will remain a net exporter of capital,” said Dr Iradian.
By Babu Das Augustine Banking Editor
Gulf News 2015. All rights reserved.
