22 March 2016
Saudi Arabia, Bahrain and Oman are expected to be the hardest hit by oil slide

Low oil prices will see state deficits across the Gulf Cooperation Council (GCC) region reach around 12.5 percent of domestic product (GDP) this year, but Saudi Arabia, Bahrain and Oman are likely to feel the impact much harder than neighbouring states, rating agency Moody's said on Tuesday.

"GCC governments have started to cut costs and introduce new revenue-enhancing measures. Lower public spending is likely to weigh on economic growth in 2016, although we expect it to remain positive as oil production is sustained and expenditure cuts are implemented only gradually," Moody's analyst Mathias Angonin said in a statement.

Moody's estimated that the GCC region's fiscal deficit will reach close to 12.5 percent of GDP in 2016, up from 9 percent in 2015, as oil prices continue to remain low.

The rating agency forecast that crude oil prices would average $33 a barrel for 2016 and $38 a barrel for 2017, mainly due to lower demand in emerging markets and higher-than-expected supply from the United State, Iran and Iraq.

"Lower oil prices will also affect GCC public finances, eroding their fiscal reserve buffers and increasing debt levels. We also increasingly view the GCC as a two-tier region," Angonin said.


Moody's said that Kuwait, Qatar and the United Arab Emirates (UAE) are expected to post government deficits of single percentage digits of GDP, while deficits would be around 14 percent to 17 percent of GDP in Bahrain, Oman and Saudi Arabia.

Bahrain, which has been posting fiscal deficits since 2009, is forecast to record the highest percentage deficit of GDP, estimated by Moody's to be close to 17 percent.

The island state is among the most vulnerable to oil price declines as, along with Oman and Saudi Arabia, it requires a higher fiscal breakeven price. However, Oman and Saudi Arabia have lower debt levels, therefore the impact will be less severe, Moody's said.

As revenues decline, governments have struggled to curtail rising expenditure. Providing free healthcare and education to all citizens and a growing public sector wage bill has seen expenditure rise by more than 60 percent in Bahrain and Saudi Arabia, with a similar figure in Oman, Moody's said.

As a result, some governments have implemented spending cuts, such as reducing subsidies on items such as fuel, electricity and water, and ending "non-essential" costs such as bonuses and benefits for public servants.

GCC members are likely to try and counteract their deficits in the short-term by turning to debt markets, Moody's said. The agency predicts that Bahrain and Oman will record the largest increases in debt, with the government debt-to-GDP ratios rising by 35 and 18 percentage points, respectively, compared to levels in 2014.

Saudi Arabia will see its ratio rise by at least 15 percentage points, while the other three members - Kuwait, the UAE and Qatar - are expect to see lower increases of around 11-13 percentage points.

Some methods of generating alternative revenue include ongoing discussions regarding the implementation of new forms of taxation. Moody's said Oman, the UAE and Kuwait are likely to introduce or raise corporate taxes or business profit taxes.

Saudi Arabia approved a 2.5 percent tax on undeveloped plots of land, while most GCC countries are considering a new tax on remittances and a GCC-wide 5 percent value added tax on goods has been scheduled to be implemented from January 1, 2018, the statement said.

Oman and Saudi Arabia are also looking at privatising state-owned companies in attractive areas like healthcare, education and hydrocarbons.

(Writing by Shane McGinley)

© Zawya 2016