Higher oil revenues to cut GCC budget deficits in 2018

KUWAIT: Budgets deficits for the GCC region in 2018 are now forecasted to reduce to $14 billion (-0.9 percent of GDP), an 82 percent reduction from 2017 budget deficits ($79 billion), based on our analysis of IMF’s general government fiscal balance estimates. The lower deficit is largely ascribed to higher oil prices expected for 2018 and over the medium term, and the ongoing revenue side initiatives and expense side optimization undertaken by GCC governments. Furthermore, as a result of higher forecasted oil prices, the region’s fiscal balance is expected to swing to surplus in 2019, to $30 billion (1.7 percent of GDP), as against earlier expectations of a surplus only in 2020. Consensus of oil price forecasts and oil price futures point towards $70/barrel or higher, and this should aid GCC budgets in our view.

Based on IMF’s WEO projections released in Oct-18, Kuwait, UAE and Qatar are expected to report budget surpluses in 2018 and 2019. Current account surpluses are also expected in the GCC over 2018 and 2019, and is expected to average over 7 percent of GDP over the period.

Credit trends

Inflation trends reported for Aug-18 suggested that overall consumer prices grew across UAE, Kuwait and Qatar, as quarterly inflation indices inched up between 10bps-30bps, while Saudi Arabia and Bahrain witnessed lower CPI levels. Money supply (M2) growth as of Aug-18 declined across the GCC as compared to Jun-18. Credit disbursed across the GCC was positive q-o-q in Q2-18, but witnessed mixed trends in Aug-18 as compared to Jun-18.

KAMCO Research sees better flexibility for fiscal and debt management for the region in 2019. Q2-18 real GDP estimates of GCC countries point towards growth for the region in 2018, from both oil and non-oil sectors. The backdrop of higher oil prices will also aid the expansionary budgets for 2019, as announced by Saudi Arabia and the UAE in their preliminary budgets. Saudi Arabia’s Ministry of Finance forecasts budget expenditure to climb 7.4 percent in 2019 to reach SAR 1.106 trillion from their 2018 estimate of SAR 1.030 trillion.

Further, UAE announced a 2019 federal budget draft estimate of AED 60.3 billion, a 17.3 percent increase from their budget estimate for 2018. Moreover, healthy budget revenues and adequate room in terms of balance of trade should give these GCC countries ample flexibility for debt management, in terms of timing and ascertaining size of future debt issuances. The announcement of pro-expansionary budgets coupled with higher prevailing oil prices are positive in our view and shows commitment towards diversification efforts and improving non-oil economic growth. However, going forward the nature of the OPEC+ agreement in 2019 and global trade developments will be significant for oil prices and its impact for the GCC region.

Kuwait

Real GDP in Q2-18 grew by 1.4 percent q-o-q from KD 9.79 billion in Q1-18 to KD 9.93 billion in Q2-18 driven by growth in both non-oil and oil sectors. The real oil GDP grew 1.9 percent q-o-q over the same period from KD 5.46 billion to KD 5.56 billion, while the non-oil GDP grew by 0.8 percent from KD 4.33 billion in Q1-18 to KD 4.37 billion in Q2-18. Higher oil prices drove Kuwait’s nominal GDP 8.3 percent upwards q-o-q from KD 10.02 billion in Q1-18 to 10.86 billion in Q2-18. Nominal oil GDP grew by 13.1 percent q-o-q in Q2-18 to KD 5.49 billion while non-oil GDP improved by 3.9 percent q-o-q to KD 5.37 billion. On a y-o-y basis, 45.3 percent increase in nominal oil GDP from Q2-17 to Q2-18 led to a 23.4 percent increase in Kuwait’s nominal GDP in Q2-18.

Kuwait’s trade balance surplus over Jan’18-Jul’18 posted robust growth of 72.8 percent y-o-y to reach KD 5.81 billion from KD 3.36 billion during the same period in 2017. Exports grew by 32.1 percent y-o-y from KD 9.27 billion during Jan’17-July 18 to KD 12.24 billion during Jan’18-Jul’18, while imports increased by 8.9 percent to KD 6.43 billion over the same period.

Credit facilities extended by Kuwaiti banks by the end of Aug-18 decreased by 0.3 percent from Q2-18 (Jun-18) to KD 36.19 billion. On a y-o-y basis, credit extended improved by 1.7 percent, driven by the growth in Personal Installment Loans, which grew by 7.1 percent over the period and accounted for almost a third of the credit disbursed by Aug-18. Credit to the Real Estate & Construction sectors declined on a y-o-y basis, albeit marginally, as Real Estate sector credit went down by 1.7 percent, while the real estate sector witnessed a 1.5 percent decline in credit disbursed. Kuwait’s broad measure of money supply (M2) declined marginally by 1.3 percent KD 37.92 billion in Aug-18 from Jun-18 (KD 38.42 billion), mainly due to a 6 percent drop in M1 money supply, from lower currency in circulation (-7 percent) and slight deposits (-6 percent).

Saudi Arabia

Data released by the General Authority of Statistics shows that Saudi Arabia’s real GDP in Q2-18 grew by 1.6 percent y-o-y from Q2-17, led by 2.4 percent y-o-y growth in non-oil GDP and 1.3 percent y-o-y growth in oil GDP. Growth in non-oil GDP in Q2-18 was mainly driven by the government sector as it grew by 4 percent y-o-y from Q2-17, while the private sector grew by 1.8 percent over the same period. In nominal terms GDP growth came in at 18 percent y-o-y and 6 percent q-o-q was driven mainly by the oil sector and higher oil prices. Higher oil prices also lowered Saudi Arabia’s budget deficit in Q2-18, as the deficit declined 79 percent q-o-q (Q1-18: SAR 34.33 billion) and 84 percent y-o-y (SAR 46.52 billion) to reach SAR 7.36 billion. Expenses were however higher by 34 percent y-o-y at SAR 280.95 billion, but was more than offset by increases in both oil and non-oil revenues.

United Arab Emirates

UAE’s quarterly government finances continued to strengthen from Q4-17 to Q2-18 as gross operating balance surplus grew from AED 3.70 billion in Q4-17 to AED 21.71 billion in Q2-18. The surplus seen in Q2-18 was up over 83 percent as compared to Q1-18 (AED 11.80 billion), despite higher budget expenses in Q2-18 (AED 95.01 billion) as compared to Q1-18 (AED 91.26 billion). Higher revenues drove the improvement in fiscal surplus, as revenues reached AED 116.71 billion. In terms of quarterly economic growth; the Central Bank of UAE estimates Q218 real GDP growth to have come in 2.3 percent q-o-q, up from the 1.6 percent q-o-q growth witnessed in Q1-18 based on their Augmented Economic Composite Indicator (AECI).

Qatar

Qatar’s real GDP in Q1-18 receded by 3.6 percent q-oq and reached QAR 199.20 billion. The non-oil sector which accounts for over 68 percent of the economy declined by 4 percent q-o-q from Q4-17, largely contributed by 5 percent drop in private sector growth. Oil sector growth also slowed by 3.3 percent q-o-q from QAR 53.87 billion to QAR 51.07 billion. Nevertheless, Qatar’s current account surplus grew in GDP terms from 6.4 percent of GDP in Q4-17 to 7.3 percent of GDP in Q1-18, as per the Ministry of Development Planning and Statistics. Qatar reported a fiscal surplus of QAR 1.04 billion in Q118 after posting fiscal deficit of QAR 35 billion in 2017. The surplus came in Q1-18 came in as a result of 22.3 percent q-o-q growth in revenues while expenditure went down by 4.8 percent over the same period.

Bahrain

Real GDP growth in Bahrain grew by 6.1 percent q-o-q in Q2-18 and reached BHD 3.22 billion from BHD 3.04 billion in Q1-18. The Mining and Quarrying sector, which predominantly includes crude oil & natural gas, was the key driver for the increase as the sector grew by 22.3 percent q-o-q in real terms. The Manufacturing sector, which accounts for 14.5 percent of Bahrain’s total GDP, improved by 0.3 percent q-o-q, while the Construction and Real Estate sectors, that combine together for 12 percent of the total GDP grew by 0.7 percent on average during the second quarter of 2018. In the Services sector, Financial Services (16 percent contribution to total GDP) grew by 1.3 percent q-o-q in Q2-18.