Rising oil prices trigger fiscal loosening in GCC: Capital Economics

The recent rally in oil prices has already prompted governments across the Gulf to shift away from the harsh austerity of recent years, yet greater prudence and low long-term oil price expectations will limit any splurge, Capital Economics (CE) said in a report.

The recent rise in oil prices shows no sign of slowing down. Following US President Donald Trump’s decision to exit Iran’s nuclear deal, Brent crude has risen further and has broken through $80 per barrel– its highest level since late-2014.

The Gulf economies are among the big winners from the rally, as at $80pb, the region’s annual hydrocarbon export revenues would be approximately $170 billion (or 8.5 percent of GDP) higher than they were last year.

“After several years of harsh austerity, governments in the Gulf are more likely to use the windfall to boost spending and support economic growth, rather than stash it away in their sovereign wealth funds,” CE said.

Recently-released data show that Saudi Arabia’s underlying fiscal stance was loosened in Q1 as a sharp rise in spending more than offset an increase in non-oil revenues.

Meanwhile, Kuwait’s parliament recently agreed to postpone the implementation of a new value-added tax until 2021 at the earliest.

The extent to which governments will be able to loosen fiscal policy will depend on a number of factors, including the level of oil prices needed to fund current spending levels, the report said.

Saudi Arabia, Bahrain and Oman need oil prices to rise even further in order to balance their budgets, while Kuwait, Qatar and the UAE, current oil prices are more than sufficient to cover spending needs.

As for government’s asset and debt positions as a share of GDP, Kuwait, Qatar and the UAE would be well-placed to sustain a period of budget deficits. Saudi Arabia could also do so, although a sharp rise in debt would probably start to raise concerns about the sustainability of the public finances. Bahrain and Oman, by contrast, have the weakest balance sheets in the region.

Accordingly, while there has clearly been a shift in most Gulf countries away from the harsh austerity of recent years, any fiscal loosening will likely be limited.

If oil prices fall back to $55-60pb over the next couple of years (as expected), fiscal austerity is likely to come back on to the agenda in Saudi Arabia. Against that backdrop, the region’s economic recovery is likely to be slow-going.