(P)GCC Braces for Budgetary Cuts

Despite significant deficit-reduction efforts under way since 2015 in the backdrop of plunging oil revenues, all Persian Gulf Cooperation Council countries are projected to record fiscal deficits in 2017 while making substantial budgetary cuts.

Analysts expect most (P)GCC states (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman) to press ahead with substantial budgetary cuts from 30% 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 cut output, Arabian Business reported.

Across the (P)GCC, government financial assets have been drawn down as part of the deficit financing programmed over the past two years. After a significant withdrawal of financial assets in 2015, a larger portion of the 2016 fiscal deficits that amounted to about $193 billion was covered by issuing debt, analysts pointed out.

Bahrain, Oman, Qatar, Saudi Arabia, and the UAE have issued bonds and obtained syndicated loans in international markets this year.

In a market overview, Value Partners analysts point out that while oil price drop has largely impacted (P)GCC public finances and has hampered foreign direct investment, only the UAE has been capable to retrieve foreign direct investment to pre-crisis level with an increase of 117% in 2015 compared to 2008.

The report forecast that GDP growth in the (P)GCC countries would be at 2.3% in 2017, far away from the growth experienced in the past. "Oil price is the main driver of the (P)GCC economy and it is expected to remain around $51 in 2017. However, the forecast may be affected by a number of factors, including the increasing global oil production, uncertain consumption patterns and investments in the oil industry," it said.

Deficit to Continue

Fitch Ratings has forecast an oil price scenario of an average $45 per barrel in 2017 and $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 quickly to any market tightening.

While only the UAE and Kuwait are set to post surpluses by 2021, analysts expect all (P)GCC countries to remain in deficit in 2017 (-6.9%) and 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.

The Institute of Chartered Accountants in England and Wales forecast said that as one of the most diversified economies in the Persian Gulf, the UAE will witness an overall GDP growth of 2.3% this year, rising to 2.7% in 2017 as both oil and non-oil sectors improve.

"Output in the oil and gas sector, which makes up around one-third of the economy, is estimated to have risen by only 1% in 2016 after growing 5% in 2015. Non-oil growth is also estimated to slow a little further to 2.9% as the cumulative impact of low oil prices, tighter fiscal policy and liquidity feeds through."

Breakeven Prices 

According to ICAEW, the UAE and Qatar are better-placed than other oil exporting Persian Gulf Arab countries to withstand a persistent oil price slump amid bleaker outlook with a projected 2016 breakeven prices—at which oil must sell in order to balance the budget—at $57 and $44 per barrel respectively.

While breakeven prices for Kuwait and Saudi Arabia are projected at $60 and $77 per barrel respectively, Oman and Bahrain will be under the greatest pressure with breakeven prices at $104 and $97 per barrel respectively, ICAEW said while urging (P)GCC Arab states to substantially raise non-oil government revenues.