GCC deficits set to narrow amid higher revenue

GCC governments are likely to face rising levels of public debt this year, despite higher oil prices, according to Moody's.

The ratings agency’s 2017 outlook for GCC governments says that although economies will experience an average increase in revenue for the first time in three years – 8.5 per cent this year and 13.8 per cent in 2018 – most will continue to record fiscal deficits as spending pressures remain.

The report said that the region’s governments “will continue to face headwinds from subdued economic growth, increasing fiscal and structural reform fatigue, and persistent oil price volatility”.

“We expect real GDP growth in the GCC in 2017-18 to remain weak by historical standards, with an average of 1.6 per cent,” said Mathias Angonin, an analyst at Moody’s. Estimates for GDP growth range from 0.7 per cent for Saudi Arabia to 3.3 per cent for Qatar. Qatar is predicted to experience the greatest growth in non-oil revenues because of continued investment in infrastructure. The UAE’s economy is predicted to experience the second-highest rate of non-oil growth, with Moody’s arguing that fiscal consolidation in Abu Dhabi will be offset by higher project spending in Dubai.

Moody’s forecasts a 3.5 per cent growth in aggregate spending in 2017 and 4.8 per cent in 2018, following an aggregate decline of 19.3 per cent between 2014-16 as governments cut capital spending and reined in subsidies.

The average fiscal deficit is set to narrow to 7.5 per cent this year – down from 8.8 per cent in 2016 – but variances between governments are significant. The UAE, Kuwait and Qatar will record relatively low deficits of 2.9 per cent, 3 per cent and 4 per cent respectively, while Saudi Arabia and Oman are predicted to record deficits of 11.3 per cent and Bahrain 11.6 per cent.

Even though Saudi Arabia has cut benefits to public-sector employees, introduced a 2.5 per cent white land tax and is looking at US$20 billion worth of savings through project cancellations, it also forecasts a 31 per cent increase in oil revenue, which Moody’s says is unlikely to be met.

"Taking into account the production cuts that have been promised during the last Opec rounds and our own baseline oil price assumption, we think that the budgeted revenues are unrealistic," said Mr Angonin. "We estimate that the revenues will be 600bn Saudi riyals [Dh587.5bn], compared to a budgeted 692bn riyals."

Last year, the governments of Saudi Arabia, Qatar and Oman all tapped international bond markets to finance deficits, raising a combined $49.6bn. Moody’s expects the volume of debt issued by GCC states in 2017 to be lower than in 2016, even though sovereign Gulf states have been increasing their exposure to international markets.

Speaking at an Inter Business Councils Infrastructure Forum event in Dubai on Thursday, Emirates NBD’s head of Mena research, Khatija Haque, also said that she expected the level of debt issuance by GCC states to be lower than in 2016.

“Borrowing requirements for governments this year is likely to be quite a lot less than last year given that they’ve raised non-oil revenue and they’ve already taken steps to cut spending,” she said.

She said that the cost of debt issuance is also likely to be higher if, as expected, the US Federal Reserve increases interest rates.

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