Lower oil prices to slow GCC spending growth
Current costs of crude a chance to carry out planned fiscal reforms
Dubai — Lower oil prices will likely put an end to four years of large expenditure increases in the GCC as developments in global oil markets present policymakers with challenges and opportunities, Moody’s Investors Service said.
The ratings agency said in its annual “The Middle East and North Africa (Mena) sovereign outlook” report that while “most net importers are presented with benefits from improving external current account balances and lower fiscal spending on subsidies, lower oil revenues will adversely affect net oil exporters’ fiscal and external positions, with varying degrees of pressure across GCC countries.”
Lower oil prices will support subsidy reforms and improve external balances for net oil importers, Moody’s argued. “Lower oil prices will provide an opportunity to phase out fuel subsidies and carry out other planned fiscal reforms. But challenges remain for sovereigns to return to pre-2011 fiscal strengths. For GCC oil exporters, the main impact from lower oil prices will be on governments’ fiscal accounts and external balances, with a varying degree of resiliency to lower oil prices.”
“Although the net effect of the drop in oil prices is expected to be negative for all GCC countries, given the nature of the region’s subsidy systems, lower oil prices will have the beneficial effect of lowering implicit subsidies,” the ratings agency said in its report.
Moody’s observed that even at current levels, domestic retail prices are still much lower than global oil prices. But recent reforms hint at a higher transfer of the cost of utilities to end-users. “For instance, Abu Dhabi and Saudi Arabia recently indicated increases in the price of water. Abu Dhabi has introduced water tariffs for UAE nationals while Saudi Arabia announced higher tariffs for businesses and government departments.”
Steffen Dyck, a senior analyst at Moody’s, said net oil and gas importers in the region will benefit from lower oil prices, which would lead to reduced expenditure on energy subsidies thereby facilitate reform initiatives. “GCC exporters, on the other hand, will be affected through lower oil revenues, which will likely lead to cut-backs in public expenditure and in some cases, rising debt burdens,” he said.
Although lower oil prices will likely put an end to four years of large expenditure increases in the GCC, the impact on each country varies. “Oman and Bahrain are most vulnerable, while Saudi Arabia’s considerable fiscal space will start to shrink given its high break-even oil prices compared with the more resistant GCC sovereigns.” Given the limited flexibility to cut back spending in Oman and Bahrain, Moody’s expects that debt levels will rise rapidly in both countries, while Saudi Arabia and the UAE will likely tap their financial reserves to address budgetary shortfalls.
Kuwait and Qatar are most resistant to the impact from low oil prices because of their low fiscal breakeven oil prices and large financial reserves, Moody’s said.
The UAE has sizeable reserves but the country’s expenditure framework is less flexible than other GCC countries due to large transfers from Abu Dhabi to other emirates through federal services, as well as the expectation that UAE expenditures will rise in 2015, the ratings agency said. On external current account balances, Moody’s sees Oman as the most vulnerable, expecting a sizeable current account deficit in 2015.
Bahrain, Saudi Arabia and Qatar have external breakeven oil prices that are more or less in line with Moody’s oil price forecasts, and their current accounts should remain in surplus or only post small deficits. Moody’s argued that the UAE and Kuwait would remain in strongly positive positions, for two different reasons: the UAE is a large exporter of non-oil goods and services compared with other GCC countries, while Kuwait’s persistently low public spending moderates imports.
However, Mena hydrocarbon importers will benefit from the low oil price environment in 2015, with current accounts and government fiscal balances set to improve, in Moody’s view. Low oil prices will help countries with energy subsidies to reduce these.
Based on Moody’s oil price assumptions, combined net hydrocarbon imports could be up to 50 per cent lower on average between 2014 and 2016 compared to the average levels seen in 2011-13, while remittances flows will remain stable. “This would help the region’s current account balance, which posted an aggregate deficit of $28 billion — around six per cent of the region’s GDP — between 2011 and 2013.”
Moody’s expects all of the net oil importers — except Egypt — to post lower current account deficits in 2015 compared to 2014.
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