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Gulf subsidy reforms not enough to plug deficit — Moody's

By AFP - Feb 21,2016 - Last updated at Feb 21,2016

DUBAI — Fuel subsidy reforms by Gulf Arab states will help reduce pressure on budgets, but are not enough to offset deficits resulting from low oil prices, ratings agency Moody's said.

Savings from increased fuel prices in the six Gulf nations will average 0.5 per cent of gross domestic product (GDP), around $7 billion, this year against an estimated deficit of 12.4 per cent of GDP, it indicated.

"Recent moves to reform subsidies signal political willingness to address the damaging effect of low oil prices on budgets," said Moody's analyst Mathias Angonin.

"However, they fall short of the scale of economic and fiscal reform required to achieve budget balance," he added.

All the six Gulf Cooperation Council (GCC) states, which depend heavily on oil income, have reduced generous fuel, electricity and other subsidies to cut spending in the face of falling revenues.

The GCC groups energy-rich Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. All of them posted a budget deficit last year.

Moody's forecast that the price of oil will average $33 a barrel in 2016, way below its price of around $110 a barrel before it began to decline in mid-2014. It estimated the price to be $38 a barrel next year.

"While the GCC governments' balance sheets remain solid on a consolidated basis, we anticipate a sharp deterioration in the governments' net asset position as a consequence of the decline in oil prices," Moody's said.

The reforms will however lead to efficiency gains, reduce distortions caused by very low prices and cut domestic energy consumption, it added.

Moody's expects GCC states to take other fiscal measures such as raising corporate taxes and introducing value-added taxes in the face of a long period of low oil revenues.

Austerity measures, loan negotiations and state asset sales are all on the menu of moves deployed to counter the brutal nosedive in the oil price.

"These are bad times for oil producers and their creditors," Gabriel Sterne, head of global macro research at Oxford Economics, indicated in a note.

National budgets need to adjust further, financial buffers are inadequate and proper adjustment to the new situation may be delayed by weak governance, he warned, calling the assessment "bleak".

In Russia, which depends on oil and gas sales for half of government revenues, Economy Minister Alexei Ulyukayev warned that his country's budgetary situation was "critical", and that it was now urgent to implement a privatization programme that is expected to feature sales of stakes in state-owned companies such as oil giant Rosneft.

"It is no longer possible to wait," he said, just as Russia, a top global producer, was pumping oil at record levels to offset falling prices with increased volumes.

The government in Moscow has already admitted that tumbling oil prices will push it to slash spending as it struggles to keep the deficit to under 3 per cent of GDP. 

'A source of risk'

"Government deficits are growing strongly. And to maintain social peace and military spending, producer countries are in no position to cut public spending," said Olivier Garnier, chief economist at SocieteGenerale.

Trying to reduce spending regardless would be "a source of risk", he told AFP.

Last month, the International Monetary Fund warned that the sharp collapse in the price of oil is proving more of a drag on the global economy than a stimulus, pointing to the dire budgetary situation that oil exporting countries now find themselves in. 

There are big differences between the various oil-exporting countries, many of whom had accumulated vast dollar reserves while the going was good in the commodities markets. 

But even the world's biggest exporter, Saudi Arabia, is feeling the pain.

The kingdom reported last month that its fiscal reserves dropped to a four-year low of $611.9 billion last year, from $732 billion in 2014, as the government sought to finance a budget deficit caused by plunging oil revenues.

In December, Saudi Arabia had reported a record deficit and announced austerity measures, including cuts to fuel subsidies.

African producer Nigeria, meanwhile, boasting no such reserves, is seeking loans from the World Bank, the African Development Bank and other lenders to help cover this year's massive budget deficit, the government and bank officials said on Tuesday.

The budget plan, which includes sharply increased spending to stimulate the economy, calls for 1.8 trillion naira ($9 billion) to be covered by borrowing from multilateral organisations— which the government believes is the cheapest funding option.

The possibility for cash-strapped nations like Nigeria to get a friendly hearing from global lenders means that situation is perhaps not yet dramatic, according to LudovicSubran, chief economist at Euler Hermes.

"Today, exporters in Africa have enough foreign reserves for at least another year. The others are being helped by international institutions," he told AFP.

Limited room for manoeuvre

Maybe so. But while some countries may obtain "soft loans" to tide them over, other credit lines come with strings attached, notably austerity measures or forced asset sales — and therefore the danger of social trouble from already impoverished populations.

"The room for manoeuvre is very limited. Growth is slowing and adjustment is very costly because of austerity and the recession," Christine Rifflart, an economist with French think tank OFCE said in a recent report.

Venezuela, which is sitting on the biggest known oil reserves from which it derives 96 per cent of its foreign revenues, has been devastated by the drop in prices.

 

"The economic crisis in Venezuela will deepen," analysts from research group Capital Economics wrote in a recent note. "In the absence of a renewed rebound in oil prices a government debt default looks increasingly likely."

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