By Staff writer
Moody's report says fiscal deterioration will be fastest in Saudi Arabia, Bahrain and Oman
Lower oil prices will slow growth and increase budget deficits in oil-exporting Gulf Cooperation Council (GCC) countries in 2016, according to Moody's Investors Service.
The rating agency said that the GCC's fiscal deficit will reach close to 12.5 percent of regional GDP in 2016, up from 9 percent in 2015.
Moody's said it expects the fiscal deterioration to be faster in Saudi Arabia, Bahrain and Oman than in the UAE, Qatar and Kuwait, where reserves cushion the short-term negative impact and allow a more gradual adjustment.
It estimated that the savings from increased fuel prices and value-added tax will average 2.5 percent of GDP across GCC countries, which falls short of addressing fiscal challenges.
"GCC governments have started to cut costs and introduce new revenue-enhancing measures. Lower public spending is likely to weigh on economic growth in 2016, although we expect it to remain positive as oil production is sustained and expenditure cuts are implemented only gradually," said Mathias Angonin, an analyst at Moody's.
"However, lower oil prices will also affect GCC public finances, eroding their fiscal reserve buffers and increasing debt levels."
Funding of these deficits will lead to a rise in government debt and a decline in government financial assets, said Moody's. The deficit funding mix will change going forward, with governments increasing their recourse to external debt.
Moody's projected that the biggest increases will be in Bahrain and Oman, where government debt-to-GDP could rise by 35 and 18 percent in 2016 from their 2014 levels, followed by Saudi Arabia, which will see its government debt ratio rise by at least 15 percent. For the other three GCC countries it expects increases of 11-13 percent of GDP.
Moody's noted that medium-term reforms are key to relieving pressure on government balance sheets and will determine GCC sovereigns' fiscal trajectory.
Moody's oil price assumptions were revised downwards at the beginning of 2016, to $33 per barrel on average in 2016 and $38 in 2017 amid higher-than-expected supply from the US and, going forward, Iran and Iraq.