GCC government finances improve, rating agencies say

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Rating agencies such as Moody’s, Standard & Poor’s (S&P) and Fitch Ratings expect significant improvement in the finances of GCC governments.
Image Credit: Gulf News Archive

Dubai: Major credit rating agencies such as Moody’s, Standard & Poor’s (S&P) and Fitch Ratings expect a significant improvement in the finances of GCC governments, thanks to rising oil prices, recent tax reforms and improving savings.

The public finances and external accounts of sovereign GCC countries remain strongly correlated with demand and world oil prices.

“With oil prices significantly higher – even surpassing pre-pandemic levels – and oil production gradually normalizing, fiscal positions will strengthen and debt will fall for most governments in the region,” Christian said. Fang, vice president of Moody’s Investors Service.

According to S&P, rising oil prices, while supporting GCC public finances, recent tax reforms are also expected to increase government revenues. While Oman has introduced the value added tax, Saudi Arabia has tripled it to 15% and Bahrain will double its VAT rate to 10% from January 2022.

Impact of reforms

Tax reforms in the GCC have taken the form of both spending cuts and measures to increase revenue.

“Many Gulf states have shown restraint in their spending in response to the double external shocks of 2020 … (and some) have also made progress in diversifying their sources of government revenue away from hydrocarbons,” S&P said.

Moody’s expects GCC’s fiscal position to continue improving in 2022. Their baseline projections assume that oil prices will average $ 65-70 per barrel in 2022, broadly in line with the average price. in 2021 and around 60% higher than the average in 2020.

Fitch agrees. The resurgence of oil prices leads to a marked improvement in the GCC’s fiscal and external balances in 2021, alongside a reform dynamic that has taken hold to varying degrees since 2014 in response to the volatility of oil prices.

Fitch’s analysis estimates that GCC budgets, except in Bahrain, would run into surplus if oil prices averaged $ 75 per barrel in 2022. At the current price of $ 85 per barrel, Bahrain’s budget would also be close to the balance.

The resumption of economic growth is also supporting fiscal positions. Moody’s expects increased hydrocarbon production to boost the economic rebound underway in GCC countries in 2022, with growth rates expected to accelerate. While the oil sector is expected to grow 7.4% in 2022, after contracting 0.5% in 2021, the non-oil sector is expected to grow 3.6% in 2022 after increasing 4% in 2021.

Relatively high vaccination rates in the region and open borders are likely to further stimulate non-oil economic sectors such as travel, tourism and hospitality.

Reducing the debt burden and increasing surpluses

Rating agencies expect the GCC’s debt burden to decrease as high oil prices increase government revenues and financing needs decrease.
According to Moody’s, stronger fiscal positions and a continued increase in nominal GDP – initially driven by higher oil prices in 2021 and largely driven by higher production in 2022 – will support a decline in the public debt burden relative to late 2020 levels in Oman, Qatar. , Saudi Arabia and the United Arab Emirates. However, the debt burden will remain higher than before the pandemic.
“Budget buffers remain important and a source of credit support for many sovereign GCC countries. We believe that fiscal buffers in the region – which we define as the foreign currency denominated cash portion of SWF assets – remain significant, particularly in Kuwait, the United Arab Emirates, and Qatar, and sufficient to cover the whole. these governments’ debt, ”said Christian Fang, vice president of Moody’s Investors Service.

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