Dubai, UAE – The fiscal positions of the Gulf Cooperation Council (GCC) sovereigns are expected to improve due to higher oil prices, fiscal consolidation and robust non-hydrocarbon activity, according to a report by S&P Global Ratings.
The report projects a nearly $11 billion deficit on average over 2023-2026 (0.5 percent of average GCC GDP over this period) from an average of $24 billion in 2019-2022 (1.3 percent).
According to the report, higher oil prices and relative fiscal discipline have led Dubai (unrated), Oman (BB+/Stable/B), and Qatar (AA/Stable/A-1+) to repay some of their government debt. In turn, the aggregate GCC stock of net government debt should modestly improve, having weakened after oil prices fell sharply in 2015.
The report also notes that some GCC sovereigns have substantial external liquid assets available to meet their funding needs and support their economies in the face of external shocks.
Fiscal Outlook for GCC Governments
According to S&P, the cumulative general government deficit in 2023 will be around $37 billion (about 2 percent of GCC GDP), down from an aggregate surplus of $104 billion in 2022.
This is due to their expectation that the Brent oil price will fall to an average of $85 per barrel between 2023 and 2026, down from around $100/bbl in 2022.
The report also includes ongoing OPEC+-related oil production constraints in all GCC countries, except Qatar, through the end of 2024.
Aside from these factors, S&P anticipates a relatively large nominal fiscal deficit in Saudi Arabia this year due to increased government spending, including capital expenditure (capex), which will support economic activity.
Following a large cumulative deficit in 2023, the total deficit is expected to fall to $6 billion in 2024-2026. This is due to the fact that the combined deficits of $102 billion expected for Saudi Arabia (unsolicited A/Stable/A-1), Kuwait (A+/Stable/A-1), and Bahrain (B+/Positive/B) will be offset in large part by surpluses from other GCC members.
Diversification Efforts and Revenue Streams
According to the report, except for Kuwait and Saudi Arabia, nominal expenditure levels in 2023 will be broadly in line with pre-pandemic levels for GCC governments.
This suggests significant spending restraint by most governments, notwithstanding the recent external shocks of the COVID-19 pandemic and the sharp drop in oil prices in 2020.
Highlights * GCC Governments Expected to Navigate Reduced Deficits Amidst Fiscal Challenges * GCC Nations Making Efforts to Shift Away from Hydrocarbons Despite Fiscal Deficits * S&P Anticipates Fiscal Challenges Despite High Oil Prices in 2023-2026 * Dubai Leads in Reducing Debt, While S&P Expects GCC Gross Debt to Rise Moderately * S&P Analyzes Bahrain's Strive for Fiscal Balance Amidst Lower Non-Oil Receipts and Consolidation Efforts
Most countries are also diversifying their government revenue streams away from hydrocarbons. Value-added tax (VAT) was introduced in Saudi Arabia and the UAE in 2018, Bahrain in 2019 and Oman in 2021.
Saudi Arabia increased the VAT rate to 15 percent in 2020 from 5 percent while Bahrain doubled it to 10 percent in 2022.
Separately, the UAE introduced a broad-based corporate income tax, effective in June 2023.
In this report, S&P consolidated data on the UAE federal government and the emirates of Abu Dhabi (AA/Stable/A-1+), Dubai, Ras Al Khaimah (A-/Positive/A-2) and Sharjah (BBB-/Stable/A-3) for the UAE.
Fiscal Challenges for Some GCC Members
On the other hand, the report highlighted why Bahrain, Kuwait and Saudi Arabia are running fiscal deficits though oil prices are high.
According to S&P, all three have relatively high fiscal break-even oil prices compared with their GCC peers, meaning that they require either higher oil prices or export volumes, expansion of other non-oil revenue sources, or sharper cuts in expenditure to achieve fiscal balance.
“Given our Brent oil price assumptions, the break-even oil prices indicate that only Bahrain will have a fiscal deficit from now until 2026. However, we anticipate deficits in Saudi Arabia and Kuwait during this period,” the report said.
Saudi Arabia’s 2024 pre-budget statement indicates fiscal deficits through 2025 as it increases medium-term expenditure to support development projects under the Vision 2030 program. In line with the government’s revised spending plans, S&P expects fiscal deficits of about 3 percent of GDP in 2023, followed by an average 1 percent deficit from 2024 to 2026.
Similarly, S&P expects Kuwait to report fiscal deficits averaging 14 percent of GDP in 2023-2026 due to high expenditure, notwithstanding relatively high oil prices. The reason for the deficits is that S&P forecasts do not include our estimates of Kuwait Investment Authority (KIA) investment income and include the government’s discretionary 10 percent revenue transfer to the Future Generations Fund.
In addition, Kuwait’s 2023-2024 budget plans a sizable increase in expenditure, including a policy to create new public sector jobs, permit government employees to convert vacation day balances into cash payments and pay arrears to the Ministry of Oil and Ministry of Electricity. That said, Kuwait’s general government fiscal position remains very strong because of KIA assets and the government’s low debt burden of about 5 percent of GDP in 2022.
The Bahraini government is targeting close to fiscal balance by 2024. S&P does not currently expect the target to be met because of lower-than-projected non-oil receipts and higher overall expenditure, the latter partially owing to delays in rationalizing social subsidies.
However, deficits could be lower than under our base case should the government fully commit to consolidation measures, the report said.
“We also note that Bahrain’s fiscal break-even oil price remains high but has fallen compared to 2020 due to the post-pandemic increase in revenue aided by the government’s non-oil revenue diversification efforts,” the report said, adding that the 12 percent reduction in Bahrain’s fiscal break-even price is similar to that of Kuwait, while the 32 percent lower fiscal break-even in Oman indicates the very strong budgetary consolidation that has supported our three upgrades–to ‘BB+’ from ‘B+’–since 2020.
GCC governments’ debt strategy developments
Prudent fiscal policy and the relatively higher oil price environment have resulted in some governments repaying part of their debt stock when it comes due.
According to S&P, Dubai has been repaying its debt, including $1.9 billion in bonds from 2020 to 2022, and reduced its loans from bank Emirates NBD by 33 percent over the same period.
“This year, we expect a further decline in debt by about AED 30 billion ($8 billion), in line with the Dubai government’s recent announcement regarding debt reduction, including the partial settlement of financing extended by the Abu Dhabi government and Central Bank of the UAE. As a result, we expect Dubai’s gross general government debt to decline to 46 percent of GDP by year-end 2023 from 79 percent in 2020,” the report reads.
Conversely, the Qatari government intends to reduce its overall debt-to-GDP ratio by repaying maturing external debt. S&P expects the government’s strategy to reduce total general government debt to 31 percent of GDP by 2026, from about 46 percent in 2022.
For Oman, S&P forecasts a reduction in gross government debt to 32 percent of GDP in 2026 from 38 percent of GDP in 2023 due to continued deleveraging by the government and increasing nominal GDP.
Despite S&P’s expectation of reduced GCC funding requirements, they expect the region’s gross debt to rise moderately in nominal terms, owing primarily to increased issuance in Saudi Arabia and Kuwait.
Over the next two years, they expect the authorities to adopt measures to diversify Kuwait’s sources of financing, such as a new debt law, either via parliamentary vote or possibly via an emiri decree.
For the GCC, borrowing will be mitigated by deleveraging in Oman, but even more so in Qatar. Saudi Arabia accounts for about 45 percent of total GCC debt in 2023, followed by the UAE (22 percent), Qatar (16 percent), Bahrain (9 percent), Oman (7 percent), and Kuwait (1 percent).