Sunday, Feb 19, 2017

Dubai: The adverse impact of rapid pace of fiscal reforms, primarily from spending cuts by governments, government related entities (GREs) followed by increased utility tariffs, energy costs and higher government fees are expected to moderate economic growth in the Gulf Cooperation Council (GCC) this year, according to economists.

“The deep pace of fiscal adjustment has had a limited impact on narrowing the deficit in a lower oil price environment, though resulted in a sharp deceleration in economic activity,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).

Analysts say countries such as Bahrain and Oman are likely to require substantially more fiscal rebalancing going forward. External funding support will be critical for Bahrain and Oman to support investment and cover the deficits. The fiscal deficit will likely remain about 10 per cent of GDP in 2017 for Saudi, Oman and Bahrain.

“Within the GCC, we see Kuwait, Qatar and the UAE requiring fewer fiscal and spending adjustments in the outlook period. Nevertheless, we still expect to see Abu Dhabi and Qatar looking to maintain fiscal discipline and improve their fiscal structure including for GREs despite the rise in the oil price and the small fiscal deficit forecast,” said Malik.

Economists and policymakers agree that in the context of subdued non-oil activity, further medium-term fiscal adjustment is required to lower the GCC fiscal deficit. Budget break even (BBE) oil prices have fallen over the last two years with the retrenchment in government spending and to a lesser degree reforms to raise non-oil revenues. Strong oil production levels have also helped to lower BBE prices over the last few years, though this will not be the case in 2017 assuming the output cuts remaining intact.

With the BBE oil prices remaining high, especially in Bahrain, Oman and Saudi Arabia, analysts believe that these countries will face a difficult medium-term balancing act between the scale of fiscal reform required and the need to support its growth and diversification objectives.

“Fiscal consolidation over the coming years will decelerate and is likely to rely more on mobilisation of additional non-oil revenue. The authorities are raising fees, charges, and excise taxes, and a value added tax (VAT) at 5 per cent is expected to be introduced in 2018 in all GCC countries. Also, the authorities plan to privatise a range of public sector assets,” said Garbis Iradian, Chief Economist of Institute of International Finance.

The sizeable fiscal consolidation efforts should put the fiscal stance on a more sustainable footing in the medium term provided that oil prices recover gradually.

Wider fiscal reforms such as subsidy reductions, fee increases, etc for 2017 announced so far have been substantially less than in early 2016. This was particularly the case for Saudi Arabia, which introduced widespread government subsidy cuts at end-2015 and early 2016. These included raising the price of water, electricity and natural gas.

Only Abu Dhabi has seen further reductions in subsidies so far in 2017, with increases in utility prices for both nationals and expatriates.

“We believe that this weaker pace of fiscal adjustment so far in 2017 reflects to some degree reform fatigue, especially given the impact on corporates and consumers. Oman has capped the price of M91 petrol (the most used) at the February level, after protests against rising fuel prices, until the government can implement mechanisms to support deserving citizens,” said Malik

Saudi Arabia is expected to announce further fiscal and subsidy reforms, once a cash transfer mechanism to support low- and middle-income families is in place. The government will provide cash payouts to compensate for the reduction in subsidies. The kingdom aims to remove all energy subsidies by 2020.

In Oman, the Ministry of Finance has asked all state-owned enterprises to stop dispensing annual bonuses for 2016 and benefits to employees in a move to rationalise spending.

By Babu Das Augustine Banking Editor

Gulf News 2017. All rights reserved.