RIYADH: GCC governments are set to ease up on fiscal austerity in 2018, benefiting from higher oil prices and from the measures they have taken in the past few years to restrain spending, reform subsidies and raise non-oil revenue.
However, by raising government spending and focusing on social stability and economic diversification, governments risk returning to the pro-cyclical policies of recent years, leaving themselves ill-prepared for the next oil price downturn, report Agencies.Meanwhile, geopolitical risks are elevated after a whirlwind of events in 2017.
Average Brent oil prices, at around $70 per barrel so far this year, are approaching the fiscal break-even level in Saudi Arabia (A+/stable) and Oman (BBB-/negative). Fitch Ratings estimates that, under current forecasts for spending, both would post budget surpluses if Brent averages above $80 per barrel in 2018.
However, this more benign fiscal environment could prompt both countries to loosen the purse strings, preventing stabilisation of their external reserve levels and leading to a continued build-up of debt. Saudi Arabia, facing lacklustre non-oil growth, already introduced a new stimulus programme just days after announcing an expansionary 2018 budget. It has also pushed out its target of reaching fiscal balance to 2023 (from 2020 originally).
Oman’s 2017 budget deficit was in excess of what had been budgeted, despite higher-than-expected oil prices. Having to diversify the economy and provide jobs to a young, rapidly-growing and underemployed population of Omanis, the government will find it tough to let spending drop off as existing projects are completed. Whether Oman sticks to its spending targets, thereby helping stabilise its public and external debt ratios, will be key to any resolution of the negative outlook on its ratings.
Bahrain, which Fitch Ratings recently downgraded to BB-/stable, is facing a challenging year even if the recent strength in oil prices is sustained, with a fiscal break-even Brent price of around $100 per barrel. Some subsidy reforms and spending restraint notwithstanding, the government has yet to identify a clear medium-term strategy to tackle high deficits.