By Sam Bridge
Fitch Ratings says fiscal balances will weaken across much of the Gulf region in 2019 and 2020
Headline fiscal balances will weaken across much of the Gulf region in 2019 and 2020, maintaining pressure on sovereign and external balance sheets, according to Fitch Ratings.
The ratings agency said in a new research note that last year's fiscal policy loosening has been exacerbated by lower oil prices.
"We expect most GCC fiscal balances to worsen by 1-2 percent of GDP this year under our assumption that Brent will average $65 per barrel, down from $71.60 in 2018. Interim H1 2019 outturns show significantly narrower fiscal deficits in Bahrain, Oman and Saudi Arabia, and continued surpluses in Kuwait and Qatar," it said.
"But this is mostly because of one-offs, such as Saudi Aramco's special dividend and asset sale proceeds in Oman, and the lagging impact of temporarily high oil prices on budgetary hydrocarbon revenues. Our full-year 2019 fiscal forecasts reflect lower average oil prices and higher spending, which is traditionally concentrated towards year-end," it added.
Fitch said it estimates that a $10 per barrel change in oil prices affects government revenues by 2-4 percent of GDP, depending on the country.
Fitch added that production volumes are also pressuring hydrocarbon revenues.
"We expect improvements in non-oil primary deficits relative to non-oil GDP in 2019 - indicating a tighter underlying fiscal stance - following last year's deterioration in most of the GCC. This also reflects recovering non-oil growth due to higher government spending. Bahrain and, to a lesser degree, Oman are pursuing expenditure restraint and Kuwait and Abu Dhabi are likely to under-execute their stimulus and development programmes," noted Fitch.
"We expect Saudi Arabia and Qatar's budgeted spending increases to be realised, although Saudi Arabia's 2020 pre-budget statement on October 31 projects significant under-execution of spending and revenue this year, relative both to the original budget and Fitch's forecasts."
Structural fiscal reforms this year include introducing VAT in Bahrain, excise tax in Oman, and expanding existing taxes and levies in Saudi Arabia.
But these will only partially offset lower oil prices and higher spending, said Fitch.
Bahrain is the only GCC sovereign where Fitch forecasts the 2019 fiscal balance to improve and is making the most progress on fiscal consolidation, with gradual implementation of a plan helped by interest-free financing from GCC allies.
"We expect further improvements in non-oil primary balances in most GCC countries in 2020, but only in Bahrain and Oman is this likely to lead to narrower headline deficits. Even here lower oil prices will present challenges. These countries have the weakest balance sheets in the region and are under the most pressure to reform," said Fitch.