Fitch Ratings-Hong Kong/London: Fiscal balances are set to weaken across much of the Gulf Cooperation Council (GCC) in 2019, maintaining pressure on some sovereign balance sheets. The effects of fiscal policy loosening that started last year will be exacerbated by lower oil prices. 2019 budgets so far point to still higher spending and only gradual fiscal reform, but we expect that weaker oil prices will prompt several countries to pare back their spending during the year.

In most of the GCC, we expect fiscal balances to worsen by 1-2pp of GDP this year under our assumption that Brent will average USD65/bbl, down from over USD70/bbl in 2018. Fiscal plans announced for 2019 include some further reforms, such as the introduction of excise tax in Oman and Qatar, and higher expat levies and improved tax collection in Saudi Arabia. Nevertheless, these measures will only partially offset the headwind from lower oil prices and higher spending. We estimate that a USD10/bbl change in oil prices impacts government revenues by 2-4pp of GDP, depending on the country.

https://infogram.com/fw-gcc-fiscal-balances-jan-2019-1hmr6gg5olzo6nl

We estimate that the non-oil primary deficit relative to non-oil GDP, a measure of the underlying fiscal policy stance, increased in most GCC countries in 2018. This is in spite of dramatic improvements in headline fiscal balances and reflects policymakers' decisions to use up some of last year's oil revenue windfall to support social stability and the recovery in non-oil growth (which should help non-oil primary balances improve in 2019). Fiscal expansion is mirrored in higher breakeven oil prices, which remain well above expected oil price levels for Bahrain, Oman and Saudi Arabia. 

https://infogram.com/fw-gcc-fiscal-breakevens-jan-2019-1hnq41wgnpop63z


December's budget announcements by Saudi Arabia, Oman and Qatar all include higher spending allocations in 2019 compared with 2018 budgets. However, in Oman and Qatar, spending is still budgeted to be less than our expectation of full-year 2018 outturns. Furthermore, in Qatar, the cycle of capital spending, around 20% of total spending, appears to be peaking, and LNG revenues, which lag oil prices, will remain somewhat supportive in 2019. 

Saudi Arabia's planned spending is 13% above the previous budget, and 5% above 2018 outturns, partly on the assumption of oil revenue growth. We expect 2019 fiscal positions in Saudi Arabia and Oman to be tighter than budgeted as lower-than-expected oil revenues limit the scope for additional spending.

Abu Dhabi and Kuwait have not published their budgets yet, but government spending there is likely to increase as well. In Abu Dhabi, this will partly reflect the start of the three-year stimulus package worth 5% of GDP announced last year amid concerns about weakness in non-oil growth and the real estate sector. In Kuwait (where the fiscal year ends in March), our expectation of spending growth reflects the government's difficulty in restraining its wage bill against the backdrop of steady labour force growth, entrenched public expectations, and demands from an uncooperative National Assembly.

Only in Bahrain do we expect the underlying fiscal stance to have improved in 2018, albeit modestly. Policy space was limited due to ballooning interest costs and lack of market access throughout much of last year. We do not expect the Fiscal Balance Program to be implemented fully, but it will keep Bahrain on a gradual consolidation path, and interest-free loans from the GCC support package will also support headline fiscal balances. Bahrain began gradual roll-out of VAT from January 2019.

We identify erosion of fiscal and external positions as a negative rating sensitivity in all GCC sovereigns. The risk is greater for countries that are already running fiscal and external deficits. Some deterioration is already reflected in the ratings, particularly in Bahrain and Oman after downgrades in March and December 2018, respectively.

-Ends-

Contact: 
Media Relations:
Peter Fitzpatrick
London
Tel: +44 20 3530 1103
Email: peter.fitzpatrick@thefitchgroup.com 

© Press Release 2019

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