Oil production cuts to push GCC budgets deeper into deficit
The OPEC+ agreement and output cuts announced recently will push GCC budgets deeper into deficit as they will contribute to a stark contraction in economic output, along with a recession in non-oil economies in the GCC, Fitch Ratings said.
OPEC+ agreed last month to cut their output by 9.7 million barrels per day (bpd) for May-June.
This week, Saudi Arabia announced that it would reduce another 1 million barrel per day (bpd) next month, while the UAE committed to an additional cut of 100,000 bpd in June and Kuwait said it would reduce 80,000 bpd.
“We now expect most GCC sovereigns to post fiscal deficits of 15 percent-25 percent of GDP in 2020, with only Qatar's deficit staying in the single digits at 8 percent of GDP. This assumes an average Brent oil price of $35/bbl and full compliance with the OPEC+ deal to limit production,” Fitch said.
This also assumes that the additional cuts announced this week will last until the end of the year.
The production cuts introduced so far may not be enough to support oil prices according to Fitch. A further decline of $10 per barrel in average prices this year would increase deficits by 4 percent to 6 percent of GDP, while a 5 percent cut to production would widen fiscal deficits by 1 percent to 2 percent of GDP.
GCC countries have announced economic stimulus packages to help their economies in the fight against the coronavirus outbreak.
According to the ratings agency, these amount to nearly 30 percent of GDP in Bahrain and Oman, more than 10 percent of GDP in Kuwait, Qatar and the UAE and over 7 percent of GDP in Saudi Arabia.
“We estimate that the budgetary effect of stimulus will be smaller (at about 5 percent of GDP in Saudi Arabia and 1-2 percent of GDP elsewhere), mostly relating to suspension and deferral of government fees and taxes, accelerated payments to contractors, increased health spending and salary support to the private sector,” Fitch said.
The ratings agency forecasts a non-oil recession ranging from a decline of 1 percent in Kuwait to 5 percent in Oman. It also expects the governments with the weakest balance sheets to press ahead with spending cuts sufficient to outweigh the direct fiscal effect of stimulus measures.
“In the higher-rated GCC sovereigns, large wealth funds and central bank reserves and manageable government debt levels will stave off pressure on external funding and on exchange-rate pegs. In lower-rated Oman and Bahrain, (further) support from the rest of the GCC may be necessary for the sustainability of their currencies and debt levels,” Fitch said.
