GCC budget gaps forecast to further narrow in 2018

Single-digit deficits expected by 2020

KUWAIT: Budgets deficits for the GCC region in 2018 are forecast to come in at $51 billion, a 52 percent reduction from 2017 budget deficits ($107 billion), based on our analysis of IMF’s general government fiscal balance estimates. Expense optimization and reduction initiatives are key drivers for the lower budget gaps, while Saudi Arabia is expected to contribute to about 63 percent of the region’s budget deficits, despite lowering expenditure by 14.3 percent yo-y. Nevertheless, we forecast budget deficits to come in lower, as higher revenues are expected if oil prices were to stay at levels seen in Q1-18 (above $ 60/bbl) for the rest of 2018. Current account balances in the GCC over 2017-2019 are estimated to move into surplus, albeit marginally, and is expected to average 0.3 percent of GDP over the period.

Credit trends and monetary indicators such as liquidity and inflation mixed Inflation trends reported for Q4-17 suggested that overall consumer prices grew across UAE, Kuwait and Qatar, as quarterly inflation ranged between 0.5 percent-1 percent, while Saudi Arabia and Bahrain witnessed lower CPI levels. Money supply (M2) growth for Q4-17 was also broadly positive across UAE, Kuwait & Qatar with 1.5 percent-6.0 percent growth registered for the quarter. Credit disbursed across the GCC was mixed, as quarterly lending grew in UAE (0.4 percent), Qatar (1.8 percent), Bahrain (1.7 percent) and Oman (1.7 percent).

We expect initiatives to bolster the GCC non-oil economy to continue; but be less synchronized than the previous years, as individual GCC countries are likely to use different fiscal tools to shore up their state finances. A case in point is the introduction of VAT in the UAE and Saudi Arabia, while other GCC countries are yet to implement VAT measures, even as the IMF estimates VAT to generate additional revenue in the range of 1.5 percent-3 percent of region’s non-oil GDP. Other independent revenue measures include excise taxes implemented in the UAE & Saudi Arabia in 2017, higher fees introduced for government services and taxes on vacant lands introduced in Saudi Arabia, while other countries prepare to implement business profit tax reforms. Leading indicators for the non-oil economy in 2018 still remain healthy in our view, as purchasing manager indices (PMI) for Saudi Arabia and UAE show expansion, while the IMF estimates a real non-oil GDP of 2.4 percent for the current year. Timelines and newer initiatives will hinge on oil price signaling from OPEC production cuts beyond Dec-2018, in our view. Kuwait

Total government revenues for Kuwait in 2017/18 is estimated to increase and grow to KD 13.3 billion from KD 13.1 billion in 2016/17, as per the Ministry of Finance. The growth is ascribed to non-oil revenues, which is estimated to grow from KD 1.4 billion in 2016/17 to KD 1.6 billion in 2017/18, while oil revenues are expected to stay stable at KD 11.7 billion over both fiscal years. On the other hand, expenditure also grew from KD 17.7 billion in 2016/17 to KD 19.9 in 2017/18, as capital expenditures, subsidies and salaries & wages grew in the current fiscal year.

Government finances are estimated to stay in the negative over 2017/18, however the Ministry of Finance expects an improvement in the next fiscal year. In 2018/19, the deficit is expected to be lower by 23.7 percent, before contribution to FGF (Future Generations Fund). Higher oil revenues (+13.7 percent) and non-oil revenues (+8.5 percent) are key drivers for the y-o-y improvement in 2018/19, despite the marginally higher expenditure (+0.5 percent) in the fiscal year.

Credit facilities extended by Kuwaiti banks by the end of Q4-17 decreased by 1.2 percent q-o-q to KD 35.4 billion. On a y-o-y basis however, credit extended improved by 3.2 percent, driven by the growth in Personal facilities, which grew by 4.4 percent over the period and accounted for over 43 percent of the credit disbursed by December-17. Credit to the construction sector however declined on a y-o-y basis, as credit disbursed by the sector went down by 11.1 percent, while the real estate sector witnessed a 2.7 percent growth in credit disbursed. Kuwait’s broad measure of money supply (M2) jumped by 1.6 percent q-o-q to KD 37.1 billion in Q4-17, after remaining broadly stable in Q3-17 (+0.2 percent), as Q417 growth was driven by an 8 percent q-o-q growth in currency in circulation.