Gulf states to see fiscal deficit of 12.5% in 2016: Moody's

All six states in the Gulf Cooperation Council are expected to post large fiscal deficits in 2016 due to lower oil prices, eroding fiscal reserves and higher government debt, Moody’s Investors Services said in its latest outlook report.

Each country in the region is expected to see a “different level of vulnerability,” Mathias Angonin, an analyst with Moody’s sovereign risk group, said ahead of the 11th annual GCC Credit Risk Conference in Dubai.

“Fiscal deficit for GCC was 9 percent of GDP last year. It will move up to 12.5 percent this year, and then go down as oil prices recover,” he said, adding that all Gulf countries have the reserves that can absorb this deficit. 

Saudi Arabia, Oman, and Bahrain are "particularly vulnerable" to current economic challenges, due to their higher fiscal breakeven oil prices and lower reserves. The three countries are expected to post a deficit between 14 and 17 percent of GDP this year.

At the same time, debt levels within Oman and Saudi Arabia are still very low and their financing mix will likely shift towards external debt issuance, Moody’s added.

Kuwait, Qatar, and the United Arab Emirates are likely to be less affected, and face a deficit somewhere in the high single digits.

Currency pegs here to stay

The GCC's large foreign-currency reserves provide ample room to keep their currencies pegged to the dollar for several years. The benefits of the pegs still outweigh the costs associated with one-off devaluations, Moody’s added.

“Currency de-pegs would raise uncertainty about the prices of imported goods, stoking inflationary pressures,” Angonin said.

“One-off re-pegs would also undermine the peg's credibility and lead to what could become self-fulfilling speculation about follow-up devaluations,” adding that fiscal and trade gains from the move are likely to be limited.

Fiscal reforms to have limited impact

The report notes that fiscal reforms introduced by Gulf countries will be gradual, and predicted that imbalances would remain "considerable because spending cuts will barely compensate for the renewed oil price slump in 2016, which will lead to a more rapid increase in debt levels in 2016 than in 2015."

Moody’s says financial impact of subsidy reforms introduced by GCC states will likely be limited.

“We have quantified fuel subsidy reform, for example, and we think it will have an impact of less than 1% of GDP over all GCC countries,” Angonin added.

Earlier this month, Moody's placed the six GCC countries on review for a possible downgrade, and said it would be monitoring further action on fiscal reforms as it prepares fresh ratings to be released in May. 

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com