The relatively low public debt ratios, large financial buffers, and sizeable fiscal consolidation, combined with a modest global oil price recovery, should put Gulf Cooperation Council (GCC) countries’ fiscal positions on a more sustainable footing, according to the Institute of International Finance (IIF).
“The sizeable fiscal consolidation efforts should put the fiscal stance on a more sustainable footing in the medium term provided that oil prices recover gradually to $60 by 2020,” Washington-based IIF said in a report.
The consolidated fiscal deficit would narrow steadily to about 1.8% of GDP (gross domestic product) by 2020 and public debt would peak at 45% of GDP in 2020 and then broadly stabilise, it said.
Highlighting that sharp and sustained oil price fall since mid-2014 has made fiscal adjustment “unavoidable”, it said consolidated sovereign spending was axed 12% in real terms in 2015 (against an average annual 15% rise in 2003-14), and “we expect a further 8% cut this year”.
With fiscal consolidation underway, low-priority projects have been cancelled, subsidies being reduced and wage bill being contained, it said, adding with further spending cut in 2016, assuming spending level freeze thereafter in real terms, the government expenditure to non-oil GDP ratio is slated to fall from 60% in 2014 to 40% by 2020.
Finding the GCC strategy to mobilise additional non-oil revenue; IIF said the authorities are raising fees for public services and a 5% value added tax is to be introduced in 2018, apart from privatisation.
The significant spending cut has lowered fiscal breakeven oil prices. The weighted average fiscal breakeven price of oil for the GCC is expected to decline steadily from a peak of $87 in 2014 to $66 by 2017.
Notwithstanding the consolidation efforts, the GCC may see the largest deficit of $120bn (8.7% of GDP) in 2016, it said, adding lower oil revenues will be offset by the projected 10% decrease in real spending.
While public foreign assets (reserves and sovereign wealth funds or SWFs) are large and sufficient to finance deficits at least over the medium term, several countries are tapping global debt markets to limit “crowding” out of local business financing, IIF said.
In 2015, most financing was done domestically, including official reserves, withdrawal of deposits from banks and domestic bonds issue; but deficits in 2016 and 2017 are to be funded materially by foreign funding, given the low global interest rate, and SWFs, it said.
“We expect 30% of the financing requirement in 2016 to be met by external borrowing in order to alleviate tight liquidity at home,” it said, adding domestic borrowing is expected to be 40%; leaving about 30%, still to be financed from official reserves and SWFs.
Observing “significant” differences in the GCC financing strategies; IIF said Kuwait, which has mainly been tapping its SWF, plans to raise funds from both global and domestic capital markets. Its planned Eurobond has, however, been postponed to 2017.
Abu Dhabi, which has been tapping its foreign assets and government deposits in commercial banks, raised $5bn in Eurobonds this April. Oman is funding about 60% of its deficit through debt, mostly external, and the remainder by drawing on its reserves.
Saudi Arabia’s strategy has shifted, from predominantly relying on tapping its official reserves to increased external debt; while Qatar is borrowing mainly externally to bridge its budget shortfall, recognising the historically low global borrowing cost and that its SWF can potentially generate higher returns; and Bahrain, which doesn’t have enough buffers, is relying entirely on domestic and foreign debt.
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