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The OPEC+ agreement and the additional oil output cuts announced this week will push GCC budgets even deeper into deficit, according to Fitch Ratings.
Saudi Arabia said on Monday it would add to existing cuts by reducing output by another 1 million bpd next month — equivalent to 1 per cent of global oil supply — slashing total production to 7.5 million bpd, down nearly 40 per cent from April. In addition, the Kingdom has urged OPEC+ members to slash output further to stabilize the oil market.
According to Fitch, oil production cuts are expected to contribute to a stark contraction in economic output, along with a recession in non-oil economies in the GCC, the rating agency said in a comment.
Spike in deficits
Fitch expects most GCC sovereigns to post fiscal deficits of 15 per cent to 25 per centof GDP in 2020, with only Qatar’s deficit staying in the single digits at 8 per cent of GDP. This assumes an average Brent oil price of $ 35/bbl and full compliance with the OPEC+ deal to limit production.
Oil output is expected to fall by about 10 per cent relative to 2019. Most fiscal break-even prices are in the $65 to $75/bbl range, although Qatar and Bahrain are outliers at about $53/bbl and $94/bbl, respectively.
The production cuts announced so far may prove to be insufficient to support prices. A further $10/bbl decline in average prices this year would increase deficits by 4 per cent to 6 per cent of GDP (Kuwait being an outlier with an impact of 9 per cent of GDP). A 5 per cent cut to production would widen fiscal deficits by 1 to 2 per cent of GDP with a much smaller impact in Bahrain and Qatar.
All GCC countries have announced economic stimulus packages. These amount to nearly 30 per cent of GDP in Bahrain and Oman, more than 10 per cent of GDP in Kuwait, Qatar and the UAE and over 7 per cent of GDP in Saudi Arabia. They consist largely of monetary and off-budget measures, for example loan repayment holidays to businesses, although these could eventually result in contingent liabilities for the government if the economic downturn persists.
“We estimate that the budgetary effect of stimulus will be smaller (at about 5 per cent of GDP in Saudi Arabia and 1 to 2 per cent of GDP elsewhere), mostly relating to suspension and deferral of government fees and taxes, accelerated payments to contractors, increased health spending and salary support to the private sector,” Krisjanis Krustins, Director at Fitch wrote in a note.
Growth impact
Fiscal policy in the GCC tends to be pro-cyclical with the oil price, but consolidation this year will be hampered by and deepen the recession in the non-oil economy stemming from measures to contain the coronavirus outbreak, according to Fitch.
“We forecast a non-oil recession ranging from a decline of 1 per cent in Kuwait to 5 per cent in Oman; negative non-oil growth is unprecedented in the recent history of the GCC and raises risks to social stability,” said Krustins.
Analysts expect governments with the weakest balance sheets to press ahead with spending cuts sufficient to outweigh the direct fiscal effect of stimulus measures. Bahrain has announced spending cuts of 30 per cent, although the timing and composition of these is unclear. Oman and Saudi Arabia are planning cuts of 10 per cent and 12 per cent, respectively.
Reserves and peg
In the higher-rated GCC sovereigns, large sovereigns wealth funds (SWFs) and central bank reserves and manageable government debt levels will stave off pressure on external funding and on exchange-rate pegs. In lower-rated Oman and Bahrain, (further) support from the rest of the GCC may be necessary for the sustainability of their currencies and debt levels. In 2019, the ratio of sovereign net foreign assets (SNFA) to GDP reached about 470 per cent in Kuwait, over 230 per cent in Abu Dhabi, 130 per cent in Qatar and 70 per cent in Saudi Arabia. Oman and Bahrain had negative SNFA/GDP and also the largest debt/GDP, at 100 per cent and 60 per cent, respectively.
