Dubai – “ASWAQ”
GCC states are expected to make substantial budgetary cuts from 30 per cent upwards in order to maintain balanced budgets, regardless of signs of a gradual recovery in oil prices following the recent agreement among oil exporters to reduce output.
With the substantial budgetary cuts all GCC countries are projected to record fiscal deficits in 2017, despite significant ongoing deficit-reduction efforts since 2015 in the backdrop of plunging oil revenues.
Analysts said, across the GCC, government financial assets have been drawn down as part of the deficit financing programmed over the past two years. Ever since the significant withdrawal of financial assets in 2015, a larger portion of the 2016 fiscal deficits of approximately US$193 billion was covered by issuing debt. Bahrain, Oman, Qatar, Saudi Arabia, and the UAE have issued bonds and obtained syndicated loans in international markets this year.
While oil price drop has largely affected GCC public finances and also hindered foreign direct investment (FDI), only the UAE has been capable of regaining FDI to pre-crisis level with an increase of 117 per cent in 2015 compared to 2008.
Value Partners analysts mentioned in a market overview, GDP growth in the GCC countries is forecasted at 2.3 per cent in 2017, very much below the growth recorded in the past years. The report highlighted that oil price is the main driver of the GCC economy and it is expected to remain around US$51 in 2017. However, this forecast may be affected by a number of factors, including the increasing global oil production, uncertain consumption patterns and investments in the oil industry.
On the other hand, Fitch Ratings has forecast an oil price scenario of an average US$45 per barrel in 2017 and US$55 per barrel in 2018 for both Brent and WTI, in the backdrop of high inventories and the potential for US shale production to respond swiftly to any market tightening.
Analysts expect all GCC countries to remain in deficit in 2017 at approximately -6.9 per cent, except the UAE and Kuwait which are set to post surpluses by 2021. However, analysts caution that the rigidity of public expenses would lead to further challenges requiring actions to focus investments in the private sector, facilitate the proliferation of SMEs and improve the banking system in terms of liquidity and solvency.
Another forecast by ICAEW said that as one of the most diversified economies in the Gulf, the UAE will witness an overall GDP growth of between 2.3 per cent to 2.7 per cent in 2017, with the improvement in both oil and non-oil sectors. Output in the oil and gas sector, which makes up to about one-third of the economy, is estimated to have risen by only 1 per cent in 2016 after growing 5 per cent in 2015. Non-oil growth is also estimated to slow down further to 2.9 per cent as the cumulative impact of low oil prices, tighter fiscal policy and liquidity goes through.
According to ICAEW, the UAE and Qatar are better-positioned than other oil exporting Gulf countries to withstand the persistent oil price slump amid gloomy outlook with a projected 2016 breakeven prices, at which oil must sell in order to balance the budget, at US$57 and US$44 per barrel respectively.
ICAEW further said while breakeven prices for Kuwait and Saudi Arabia are projected at US$60 and US$77 per barrel respectively, Oman and Bahrain will be under the greatest pressure with breakeven prices at US$104 and US$97 per barrel respectively.
ICAEW analysts said businesses in the GCC should be prepared for long-term efforts by governments to close fiscal deficits and raise much more substantial revenues from the non-oil economy, as well as implement other offsetting populist policies such as increasing the national share of the workforce, especially in the private sector. However, they cautioned that this could place many pressures on businesses, including higher labour costs, weaker consumer demand, and the loss of retained earnings for investment.
To ensure that the adjustment in public finances is consistent with ongoing growth, ICAEW recommended businesses to make accompanying measures that will allow tax increases to be absorbed with minimal impact on activity. Some of these measures could include welfare reforms to encourage more citizens to compete for jobs with migrants, more flexibility to negotiate wages, and deductions from profit taxes to protect investment spending.