GCC fiscal reforms to continue

Manama : GCC countries are expected to continue their fiscal consolidation in 2016, thanks to the low probability of oil-price moving above US$45 in 2016, according to National Bank of Abu Dhabi (NBAD)’S ‘Global Investment Outlook 2016’.

GCC nations had responded to the recent plunge in oil price by cutting subsidies including energy subsidy. Also, other forms of revenue including VAT, income and corporate taxes, privatisation and bond sales have been considered, the report notes.

The US dollar peg of GCC countries are expected to continue, it said. “The GCC oil exporters’ decisions to focus on fiscal policy strongly suggest that for the time being they will maintain their currency regimes, despite pressures resulting from them.”

GCC nations are following US dollar peg despite the fact that it forces them to follow US monetary decisions, irrespective of whether this is appropriate; because the GCC economies, especially Saudi Arabia, are slowing down, they could be facing monetary tightening at the wrong time, it says.

“During 2016, the GCC region is expected to register an overall fiscal deficit of around 10 per cent of GDP, indicating continued vulnerability unless oil prices rally and/or there are further spending cuts. Saudi Arabia registered a fiscal deficit of 16pc of GDP in 2015 (~$100 billion), and is expected to register a budget deficit of 13pc of GDP in 2016.”

“The GCC nations are estimated to have had about $3 trillion in net foreign assets at the end of 2014, and during 2015 are thought to have seen depletion of about U$210 billion of that total amount. We expect that a further US$180bn or so of assets could be depleted in the current Year.”

But, despite all the struggles the region is going through, it has better financial buffer in place than most other oil exporting countries. This along with the presence of low sovereign debt , have kept the region better prepared to face sustained low oil-price, the report says. 

Also, the government spending will be still healthy compared to many other nations, even though at a lower level than in recent years.