GCC’s creditworthiness outlook for 2019 stable

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JEDDAH — The outlook for sovereign creditworthiness in the Gulf Cooperation Council (GCC) in 2019 is stable overall, reflecting Moody’s Investors Service expectations for the fundamental credit conditions that will drive sovereign credit over the next 12-18 months.

Higher oil prices during most of 2018 have reduced fiscal and external pressures in the short term. However, they also weaken the impetus for governments to diversify their fiscal bases and rein in expenditure, leaving their credit profiles exposed to phases of lower oil prices. Meanwhile, geopolitical tensions will remain a key source of risk, as well as a catalyst for rising military-related fiscal spending. Longer term, the prospect of climbing unemployment if nationalization policies do not increase job availability to match demand from nationals poses political and social risks. Moodys forecast Group of 20 leading economies to grow 2.9% in 2019 and 2.7% in 2020, slower than an estimated 3.3% in 2018. Risks to global growth stem from the impact of broadening tensions between the US and China (A1 stable), and tightening financing conditions. In November 2018, OPEC lowered its forecast for the increase in global oil demand in 2019 by 70,000 barrels to 1.29 mbpd, bringing the total demand forecast for the year to 100 mbpd. A sharper-than-expected global slowdown would weaken oil demand and weigh on prices unless production was cut further. In turn, lower oil revenue for the GCC would curb non-oil and overall GDP growth as governments would be more constrained in their ability to support their economies.

Some GCC states could delay their plans to substantially raise oil production capacity if global oil demand weakens durably, Moody’s further said.

This would weigh on the region’s medium-term growth outlook. Kuwait and the UAE have both made commitments to expand oil production capacity through major upstream investment over the next two years. Abu Dhabi National Oil Company has committed $45 billion to bringing production capacity to four mbpd by 2020 from around three mbpd currently, while Kuwait Petroleum Corporation has also committed to increasing production capacity by up to that amount over the same timeframe, from around 2.8 mbpd at present.

In 2019, with most fiscal reforms now likely behind the GCC, oil prices and production will be the major drivers of fiscal balances. Under Moody’s111 current assumptions of oil prices averaging $75 per barrel (bbl) in 2019, fiscal balances will strengthen modestly compared to 2018.

The experience of the past year, however, suggests that higher oil prices, if anything, curb appetite for reforms. Fiscal breakevens9 have not fallen much in recent years. The limited pipeline of non-oil revenue and spending rationalization measures means that the region will remain exposed to future oil price declines; the sharp drop in oil prices in the fourth quarter of 2018 serves as a reminder of the vulnerability of GCC governments’ credit profiles. Should prices stay around current levels near $60/bbl, budget deficits would be materially wider and debt likely higher than we currently project.

Stalled VAT implementation is a clear indication of diminishing reform momentum. A 5% value-added tax (VAT) was due to take effect GCC-wide in January 2018, but only Saudi Arabia and the UAE implemented it on schedule. Bahrain approved the tax towards the end of 2018 and introduced it on 1 January 2019. There remains scope for Oman and Qatar to implement VAT in 2020, but the likelihood is much lower in Kuwait where parliamentary gridlock continues to obstruct the passage of legislation, and the tax has been officially delayed until 2021. Given a weak track record of policy implementation, even this deferred target may prove ambitious.

» Additional significant fiscal consolidation measures are unlikely. In Bahrain, the conditionality of financial support on fiscal steps will help to maintain reform momentum. But elsewhere, beyond VAT, excise taxes, and a few country-specific measures (see Exhibit 7), we do not expect any significant additional fiscal consolidation steps that would reduce GCC sovereigns’ vulnerability to periods of lower oil prices.10 We see remote prospects for further removal of gasoline subsidies in Kuwait. Meanwhile, slow progress on eliminating electricity and water subsidies will likely see fiscal spending in these areas rise in line with oil prices and consumption in Bahrain, Kuwait and Oman. In Saudi Arabia, the impact will be felt via lower revenue from government-related entities. Budgetary constraints in Bahrain will keep government spending tight, although fiscal targets are unlikely to be fully met. “We forecast that government spending will decline in 2019 as a ratio to GDP, mostly due to the planned civil servant voluntary retirement scheme, while implementation of the VAT and increases in domestic natural gas prices will boost revenue,” Moody’s said.

Achieving the targets of the support package agreed with its neighbors will be challenging, given the lack of track record in making large fiscal adjustments, and we expect only partial execution of the package. Nonetheless, we believe the government is committed to strengthening its fiscal position, from very weak levels, and expect it will implement a number of the planned measures. “We forecast Bahrain’s fiscal deficit to narrow to around 4.5% of GDP in 2019 from 9.1% in 2018.” Elsewhere, expenditure control will be socially and politically challenging. Already in 2018, clearance of contractor arrears and subsidy payments, alongside higher payrolls, contributed to larger-than-budgeted spending in Oman. — SG


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