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The aggregate Gulf Cooperation Council (GCC) central government deficit will fall sharply to about $80 billion in 2021 (5 percent of GDP) from $143 billion in 2020 (10 percent of GDP), S&P Global Ratings has said in its latest report.
According to the rating agency, lower deficits will be supported by higher oil prices, fiscal consolidation measures, and a higher level of economic activity as COVID-19 restrictions are lifted.
“We estimate that central government deficits will reach about $355 billion cumulatively between 2021 and 2024. About 60 percent of this relates to Saudi Arabia followed by Kuwait with 25 percent, the United Arab Emirates with 7 percent, and Oman with 4 percent,” the report said.
“The aggregate GCC central government deficit did not deteriorate by as much in 2020 as it did in 2016. This is despite a slightly lower average Brent oil price of $42 per barrel in 2020, compared with $44 in 2016, and the GCC economies being hit by the additional shock of the COVID-19 pandemic. The data indicates that while Kuwait’s fiscal deficit was much larger in 2020 and Bahrain’s deficit was broadly in line with the 2016 outturn, other GCC countries experienced stronger budgetary performance,” the report said.
“Many GCC states have shown spending restraint in response to the double external shocks of 2020, given their already large fiscal deficits going into the year. Some have also made inroads to diversifying their government revenue streams away from hydrocarbons. Value added tax (VAT) was introduced in Saudi Arabia and the UAE in 2018, in Bahrain in 2019, and Oman in 2021. The stronger regional outturn in 2020 compared with 2016 was significantly driven by Saudi Arabia, where the VAT rate increased to 15 percent from 5 percent to shore-up government revenue,” it said.
“We expect that Kuwait will register the highest central government deficit-to-GDP ratio of 20 percent in 2021, followed by Bahrain and the UAE at 6 percent, Saudi Arabia at 5 percent, Oman at 4 percent, and Qatar,” the report said.
“We expect fiscal deficits will reduce over 2021-2022 and widen again in 2023-2024 given our oil price assumptions, as well as the gradual tapering of oil production cuts in line with the May 2021 OPEC+ agreement. In our forecasts, we assume an average Brent oil price of $60 for the remainder of 2021, $60 in 2022, and $55 in 2023 and beyond,” the report said.
“Higher oil prices are supportive of our GCC government ratings but are by no means the only factor we consider. Indeed, higher oil prices derailed GCC governments’ fiscal consolidation plans in the past, leading to increased spending or delays in planned fiscal reforms. The path to significantly narrowing GCC fiscal deficits remains contingent upon the direction of government policy responses as much as it does on oil prices,” the report said.
“Since the structural decline in oil prices, many GCC sovereigns have posted sizable central government deficits. These increased funding needs prompted total GCC government debt issuance in local and foreign currency of $90 billion in 2016 and close to $100 billion in 2017. GCC government debt increased by much less in 2020 ($70 billion), due to fiscal constraints and more diversified government revenue sources. Looking ahead, we expect total annual debt issuance to average about $50 billion over 2021-2024, with higher borrowing in the outer years, when we assume lower oil prices,” the rating agency said.
“GCC governments have borrowed, for the most part, rather than liquidated their assets to fund their deficits. We assume that the $355 billion of financing required over 2021-2024 will be roughly split 50:50 between debt issuance and asset drawdowns. We base this projection on the financing trends of the past few years, governments’ explicitly stated policy decisions, and our view of the availability of assets. We expect that Bahrain, Oman, and Saudi Arabia will finance most of its deficits through debt, while Abu Dhabi, Kuwait and Qatar will draw more on their assets,” it said.
Thanks to their hydrocarbon wealth, the report said, some GCC governments have accumulated large pools of financial assets that they can use to fund their fiscal deficits.
“Government assets in Kuwait, Abu Dhabi, Qatar, Saudi Arabia, and Ras Al Khaimah exceed government debt, in some cases by a wide margin. For Bahrain, Oman, and Sharjah, their debt exceeds their assets,” it said.
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27/05/2021
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