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GCC economies to remain resilient to lower oil prices

By Babu Das Augustine, for Gulf News- Gulf Cooperation Council (GCC) economies can withstand the pressures resulting from lower oil prices without having to make significant policy adjustments but, if needed, will likely adjust their fiscal policies accordingly, said analysts.

“In general, we believe there is greater tolerance for fiscal deficits or weaker surpluses in the region compared to 2009. We expect that GCC sovereigns will adopt a multi-pronged approach in their fiscal policy responses to lower oil prices, with the composition of different measures varying from country to country,” said Steffen Dyck, vice-president and Senior Analyst at Moody’s.

Moody’s analysts say that while the six sovereign states in the GCC can withstand the pressure of oil prices averaging around Moody’s estimate of $80 to $85 a barrel in 2015, Bahrain and Oman’s credit profiles will be the most adversely affected, because these two countries exhibit a combination of high fiscal break-even oil prices and low reserve buffers.

Expenditure adjustments on non-strategic investment projects would likely be the first step, followed by a slowing in the growth or even contraction of current government spending. A number of countries have mentioned the need for subsidy reforms, and some have already started to act.
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Among the GCC countries Kuwait and Qatar are the most resilient, given their very low fiscal and external break-even oil prices, and large reserve buffers. Saudi Arabia and the UAE exhibit slightly weaker fiscal fundamentals and higher external break-even oil prices than Kuwait and Qatar. However, all four sovereigns have similar shock absorption capacities, given Saudi Arabia’s and the UAE’s large non-oil sectors and sizeable reserves.

“Overall, we remain broadly positive on the main GCC economies — UAE, Saudi Arabia and Qatar. OPEC’s GCC producers were central in the decision not to lower the bloc’s output ceiling, which reflects their economic strength and ability to compete for market share, in our view. Low debt and strong reserve positions allow these countries to further their central developmental objectives, and we do not see a major change in their stance at this point, said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.

While the sovereign wealth funds of Kuwait, the UAE, Qatar and Saudi Arabia can cover multiple years’ worth of government expenditures, Bahrain’s and Oman’s do not provide that level of cover. Of the two sovereigns, Oman’s overall government finances are healthier, while Bahrain’s external position is stronger.

Moody’s expects that Saudi Arabia’s fiscal balance will turn into a deficit in 2015, and Bahrain and Oman’s deficits will widen significantly to above 7 per cent of their respective GDP. All GCC countries except Oman should show current account surpluses in 2015.

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