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Rising oil prices, reform momentum improve fiscal outlook for GCC states

30 Oct 2021 GCC By OUR CORRESPONDENT

Muscat – Resurgent oil prices are causing a marked improvement in fiscal and external balances of the GCC countries in 2021, alongside the reform momentum that has taken hold to varying degrees since 2014 in response to oil price volatility, according to Fitch Ratings.

The OPEC+ taper of previous production cuts is also amplifying a stronger budget performance in the GCC which includes Saudi Arabia, UAE, Oman, Kuwait, Qatar and Bahrain, the ratings agency said in a commentary.

Fitch’s scenario analysis estimates that GCC budgets, except in Bahrain, would move into surplus if oil prices were to average US$75 a barrel in 2022. At the current price of US$85 per barrel, Bahrain’s budget would also be close to balance.

In a stress scenario of US$45 per barrel on average in 2022, Fitch said fiscal balances would be in deficit across the GCC region.

‘This would create the most pressure for Bahrain and then Oman. We estimate that at US$65 per barrel, gross domestic and foreign issuance in GCC sovereigns would be half of what it would be with oil prices at US$45 per barrel,’ Fitch Ratings said.

A gradual reconfiguration of fiscal policy in the GCC started with the oil price slide in late 2014.

‘We expect further fiscal reforms, especially in the lower-rated GCC sovereigns, given uncertainty over the outlook for oil prices in the context of the push to limit global hydrocarbon demand and a greater focus in the Gulf on underlying fiscal performance stripped of the impact of oil revenue,’ the ratings agency said.

However, it said the longer that higher oil prices continue, the greater the risk of looser fiscal policy. Fitch said the challenge of maintaining focus on fiscal adjustment is magnified by the policy dilemmas Gulf states face as they seek to achieve long-term fiscal sustainability, while also delivering good economic outcomes for citizens and promoting economic diversification.

‘Furthermore, trends in non-oil economic activity in the

GCC typically are linked in part to trends in government or wider public-sector spending. Governments may maintain fiscal consolidation on budget, while broader public-sector spending increases, leading to a build-up of contingent liabilities,’ Fitch added.

Oman’s daily average oil production increased by 1 per cent to 983,000 barrels per day (bpd) in September 2021 compared with 973,000 bpd recorded in the same month of last year, according to the data released by the National Centre for Statistics and Information.

The average price at which Oman sold its crude during the first nine months of 2021 remained nearly 49 per cent higher at US$68.5 per barrel compared with US$46 per barrels achieved during full year 2020.

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