GCC governments to see sharp fall in fiscal deficits from this year

Dubai: GCC governments are expected to see a sharp decline in fiscal deficits starting this year, according to rating agency Standard & Poor’s.

“We expect the aggregate GCC central government deficit to fall sharply to about $80 billion in 2021 (5 per cent of GDP) from $143 billion in 2020 (10 per cent of GDP),” said Trevor Cullinan, an analyst at S&P.

The rating agency expects most GCC government balance sheets will continue to deteriorate until 2024, since some fiscal deficits remain quite large.

Notwithstanding some GCC states' sizable liquid assets, they have regularly issued in the market. This is because they believe that the return on their assets will be greater than the cost of raising debt.

S&P estimates the government deficits to reach about $355 billion cumulatively between 2021 and. About 60 per cent of this relates to Saudi Arabia, the GCC's largest economy, followed by Kuwait with 25 per cent, the UAE with 7 per cent, and Oman with 4 per cent.

Spending cuts

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 per cent from 5 per cent to shore-up government revenue.

The rating agency said 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.

Decline in borrowings

GCC governments faced significant balance sheet deterioration since oil prices sharply fell from second half 2014. Even if prices return to much higher levels, S&P does not see ratings on GCC sovereigns returning to pre-2015 levels, absent changes in other rating factors

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.

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