Fiscal balances are set to weaken across much of the Gulf region in 2019, maintaining pressure on some sovereign balance sheets, according to new research from Fitch Ratings.
The ratings agency said 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,” Fitch said in a statement.
In most of the GCC, Fitch said it expects fiscal balances to worsen by 1-2 percent of GDP this year under an assumption that Brent oil will average $65 per barrel, down from over $70 in 2018.
Fiscal plans announced for 2019 include 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, Fitch said these measures will only partially offset the headwind from lower oil prices and higher spending.
“We estimate that a $10 per barrel change in oil prices impacts government revenues by 2-4 percent of GDP, depending on the country,” the statement added.
Fitch estimates 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.
Fiscal expansion is mirrored in higher breakeven oil prices, which remain well above expected oil price levels for Bahrain, Oman and Saudi Arabia.
December’s budget announcements by Saudi Arabia, Oman and Qatar all include higher spending allocations in 2019 compared with 2018 budgets.
Fitch added that Saudi Arabia’s planned spending is 13 percent above the previous budget, and 5 percent 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,” the rating agency noted.
Abu Dhabi and Kuwait have not published their budgets yet, but government spending there is likely to increase as well, Fitch added.
“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.”
Bahrain began gradual roll-out of VAT from the start of this month.
“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,” Fitch said.
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