GCC needs more adjustments

Dubai - Energy subsidy reforms are not enough to plug the budget deficits, says Moody's

Fuel subsidy reforms in the GCC countries are only a first step as more adjustment measures are being rolled out, starting with curbing capital and nonstrategic current spending, signalling the end of a period of large spending increases, Moody's Investors Service said in a report published on Wednesday.
Energy subsidy reforms may also impact the diversification agenda of GCC countries, which will need to find other, more targeted ways to support non-oil industries, said the rating agency.

It said fuel subsidy reforms would help address pressure from low oil prices on public finances, but these measures alone will not be enough to bring the governments' budgets back into surplus.
According to the rating agency, the GCC's savings from increased fuel prices will likely be small - an average of 0.5 per cent of GDP across GCC countries in 2016, which is around $7 billion against an estimated deficit of 12.4 per cent of GDP.
Even if governments opt to link fuel price hikes to global oil prices, the gains would be much lower than the expected fiscal deficit across the GCC, said the rating agency.
Moody's forecast that the price of oil will average $33 a barrel in 2016, way below its price of around $110 a barrel having fallen by 67 per cent from 2014 levels and 32 per cent from 2015 levels. It estimated the price to be $38 a barrel next year.
"While the GCC governments' balance sheets remain solid on a consolidated basis, we anticipate a sharp deterioration in the governments' net asset position as a consequence of the decline in oil prices," Moody's said.
The reforms will however lead to efficiency gains, reduce distortions caused by very low prices and cut domestic energy consumption, it said.
Moody's expects GCC states to take other fiscal measures such as raising corporate taxes and introducing value-added taxes in the face of a long period of low oil revenues.
However, the price hikes will also lead to efficiency gains, reducing distortions caused by artificially low prices, said the rating agency.
"Recent moves to reforms subsidies signal political willingness to address the damaging effect of low oil prices on budgets. However, they fall short of the scale of economic and fiscal reform required to achieve budget balance," said Mathias Angonin, an analyst at Moody's.
Moody's notes that the GCC governments are looking to cut other current spending and, in the medium term, increasing revenue streams.
Some of these measures may face stronger resistance in Bahrain, Oman and Saudi Arabia, where per capita incomes on average are lower - and hence purchasing power impact higher - than in Qatar, Kuwait and the UAE,
The rating agency believes that Bahrain, Oman and to a certain extent Saudi Arabia are the most vulnerable to the downturn in oil prices given their very high fiscal breakeven point to balance their budgets and relatively lower fiscal reserves. "Therefore, fiscal adjustment measures are likely to be more pronounced in 2016 in these three countries, while we anticipate that Kuwait, Qatar and the UAE will take a more gradual approach to fiscal consolidation," it said.
According to the International Monetary Fund, total energy subsidies cost the GCC countries almost $60 billion in 2015, or on average 3.6 per cent of GDP, down from $106 billion, or 6.8 per cent of GDP in 2013.
-issacjohn@khaleejtimes.com

• MENA