Solid fundamentals to buoy Gulf states
Higher oil prices, fiscal consolidation gains to see higher expenditure trajectories while keeping deficits in low single digits
Governments in the GCC are better equipped to deal with the rising interest rate environment, thanks to rising oil prices and significant savings these governments made through fiscal consolidation over the past three yeas.
Higher oil prices this year have provided space for GCC authorities to boost government spending after three years of fiscal consolidation.
In Saudi Arabia, the expected 18 per cent increase in government spending, combined with the large private sector stimulus, will boost non-oil growth.
“Higher oil prices are allowing the focus of Saudi authorities to shift to growth without a material impact on fiscal balances,” said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch.
Analysts believe the recent increase in oil prices has increased the fiscal space of the kingdom to move on a higher expenditure path while maintaining fiscal deficits in the low single-digit range.
In recent weeks, the UAE has announced a number of measures that include cuts in government fees, the easing of licensing requirements and a massive Dh50 billion threeyear stimulus package by the Government of Abu Dhabi.
The package includes measures to accelerate the payments of contracts to the private sector, as well as an increase in the wage bill to create 10,000 jobs for Emiratis, while — at the same time — easing licensing requirements for companies.
In Dubai, the Executive Council has recently approved several measures to encourage investment and boost real GDP growth. These measures include waiving fees on the aviation industry and fines on property registration, as well as freezing private school fees.
“We expect these measures to help boost growth in the UAE from 0.8 per cent in 2017, to 2.1 per cent in 2018, and 2.7 per in 2019,” said Garbis Iradian, chief economist for the Middle East and North Africa (Mena) at the Institute of International Finance.
Economists see the latest policy measures in the UAE, such as the scrapping of a mandatory deposit for private sector employees, freeing up liquidity for businesses.
Additionally, introducing a new insurance plan costing Dh60 per year for workers’ guarantees, which will replace the mandatory deposit of Dh3,000 per employee, is expected to reduce the financial burden on the private sector significantly.
‘Multi-pronged approach’
“We see the UAE’s recent policy announcements as a multipronged approach to support the economy over the short and medium-term,” said Bilal Khan, senior economist for the Mena region and Pakistan at Standard Chartered Global Research.
Analysts expect Abu Dhabi’s recently announced fiscal package to be fully covered by the revenue windfall from higher oil prices.
“Despite being a significant increase in spending, we expect that the package will be fully met by increased oil revenues,” said Thaddeus Best, an analyst at Moody’s.
Moody’s anticipates some loosening of the government’s stance, with average oil prices seen at around $60 per barrel.
The government adopted an oil price assumption of $50 per barrel for the 2018 budget, resulting in conservative revenue forecasts, which were reflected in constrained expenditure outlays.
“The recent rise in oil prices to average over $65 a barrel since the start of the year has provided the government with significantly more fiscal headroom than the budget anticipated. Our own forecasts incorporate a higher oil price assumption, with the associated revenues flowing through into greater-than-budgeted expenditures as a result,” said Best.