World Economy

(P)GCC Fuel Subsidy Reform Will Not Plug Deficit

 (P)GCC Fuel Subsidy Reform Will Not Plug Deficit (P)GCC Fuel Subsidy Reform Will Not Plug Deficit

While fuel subsidy reforms in the Persian Gulf Arab region will help address pressure from low oil prices on public finances, these measures alone will not be enough to bring the governments’ budgets back into surplus, according to Moody’s Investors Service.

Savings from increased fuel prices in the six Persian Gulf Arab nations (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) will average 0.5% of gross domestic product–around $7 billion–this year against an estimated deficit of 12.4% of GDP, the ratings agency said, Arabian Business reported.

“Recent moves to reform subsidies signal political willingness to address the damaging effect of low oil prices on budgets. However, they fall short of the scale of economic and fiscal reform required to achieve budget balance,” said Mathias Angonin, an analyst at Moody’s.

“While the (P)GCC governments’ balance sheets remain solid on a consolidated basis, we anticipate a sharp deterioration in the governments’ net asset position as a consequence of the decline in oil prices,” he added.

According to the rating agency, even if governments opt to link fuel price hikes to global oil prices, the gains from increased fuel prices would be much lower than the expected fiscal deficit.

This is based on Moody’s forecast of oil prices remaining at around $33 per barrel in 2016, having fallen by 67% from 2014 levels and 32% from 2015 levels.

However, Moody’s added that the price hikes will also lead to efficiency gains, reducing distortions caused by artificially low prices, noting that domestic oil consumption has been growing at an average of 6.7% annually over the last five years in Kuwait, Qatar, Saudi Arabia and the UAE.

In addition, Moody’s noted that (P)GCC governments are looking to cut other current spending and, in the medium term, increasing revenue streams.

Some of these measures may face stronger resistance in Bahrain, Oman and Saudi Arabia, where per capita incomes on average are lower–and hence purchasing power impact higher–than in Qatar, Kuwait and the UAE, according to Moody’s.

The impact of lower oil prices has caused ratings agency Moody’s to revise down its economic outlook for Saudi Arabia, in a week which saw rival agency Standard and Poor’s announce a two-notch downgrade of the country’s sovereign ratings.

Moody’s said it expects that GDP will shrink again this year to around 1.5% in Saudi Arabia, the lowest level in decades.

S&P cut Saudi Arabia’s sovereign rating by two notches to A- from A+. S&P also lowered Oman’s rating to BBB- from BBB+, following a reduction in November, while Bahrain was lowered to BB from BBB-, putting it two steps below investment grade.