Low oil prices continue to hurt GCC economies, more subsidy reforms expected– Moody’s

With oil prices expected to stay lower for longer, Gulf Cooperation Council governments’ fiscal and current account balances will remain under pressure, a new report by ratings agency Moody’s Investors Service has found.

The report came after the agency revised its oil price forecast this week, projecting that recovery will take place in 2017 rather than in 2016 because of slower growth in demand and faster increase in supply.

It expects brent crude to average $55 per barrel in 2015 and $53 per barrel in 2016 before gradually recovering to $60 per barrel in 2017. That’s compared to its previous forecast of $65 per barrel in 2016 and $80 per barrel in 2017.

“We expect the fiscal positions of all GCC countries to worsen in 2015, barring significant changes to oil production, planned expenditure or non-oil revenue sources, and project deficits in 2016 for all GCC members except Kuwait,” Moody’s said.

Aggregate nominal hydrocarbon gross domestic product for the Gulf states fell by 11 per cent between 2012 and 2014 to $705bn. The aggregated fiscal surplus also dropped from around 14 per cent of regional GDP to 4 per cent during the same period, the report found.

Moody’s expects that the GCC region will post a combined fiscal deficit of close to 10 per cent of regional GDP in 2015 and 2016, compared to an average aggregate surplus of almost 9 per cent between 2010 to 2014.

“We expect that the impact of lower hydrocarbon revenues on GCC public finances will spur policy adjustments in 2016,” said vice president and senior analyst at Moody’s Steffen Dyck.

“These could include reductions in subsidy spending and measures to broaden the non-oil revenue base.”

Energy subsidy reforms specifically could free up additional volumes of oil available for exports and various states have announced limited reform plans.

However, only the United Arab Emirates has so far implemented reform of retail fuel subsidies.

“As GCC states face increased financing needs, debt issuance volumes will also rise. Overall government gross borrowing needs will likely average about 12.5 per cent of regional GDP, or around $180bn per year in 2015 and 2016,” said Dyck.

Bahrain and Oman are the most vulnerable to the downturn in oil prices because of their very high fiscal break-even oil prices, the report stated.

Saudi Arabia has room to issue more debt, but widening deficits are weighing on the kingdom’s credit profile.

“While all GCC countries except for Bahrain have fiscal headroom, spending patterns and government debt levels will be important credit drivers in 2016,” the report stated.

“Kuwait’s credit profile will likely remain the most resilient, followed by Qatar and the UAE,” it added.