(MENAFN- Khaleej Times) The introduction of new taxes - most likely indirect - will be a last resort for GCC governments, which are coming under mounting pressures consequent to plunging oil prices, Moody's Investors Service said on Monday.
For most GCC governments, revenue-enhancing efforts will most likely start with adjustments to existing taxes, tariffs and other non-oil revenue, Moody's said. "Slowing or even reversing the growth in current government spending, including subsidy reforms, will be more difficult as governments seek to meet social welfare demands," the ratings agency observed in its report.
Moody's argued that most GCC economies would be resilient to the pressures resulting from lower oil prices expected to average between $80 and $85 a barrel in 2015, but warned that they would have to adjust their fiscal policies accordingly.
However, despite plunging oil prices, almost 30 per cent over the past few months, all GCC countries except Oman are predicted to show current account surpluses in 2015, Moody's said.
Kuwait and Qatar will be most resilient to lower oil prices, given their very low fiscal and external breakeven oil prices, and large reserve buffers while Saudi Arabia and the UAE exhibit slightly weaker fiscal fundamentals and higher external breakeven oil prices.
"But all four have similar shock absorption capacities, given Saudi Arabia's and the UAE's large non-oil sectors and sizeable external financial assets," the global ratings agency said in its latest report.
While the sovereign wealth funds of Kuwait, the UAE, Qatar and Saudi Arabia can cover multiple years' worth of government expenditures, Bahrain's and Oman's do not provide that level of cover.
The credit profiles of Bahrain and Oman will be more adversely affected by the lower prices because they have the highest fiscal breakeven oil prices and the lowest reserve buffers in the GCC.
Of the two sovereigns, Oman's overall government finances are healthier, while Bahrain's external position is stronger.
Moody's expects that these two countries would most likely finance any increase in fiscal deficits in 2015 through sovereign debt issuance.
"Saudi Arabia has indicated that it will use its reserve buffer to finance its emerging fiscal deficit, while Kuwait and Qatar will continue to run fiscal surpluses and therefore have no need to increase their debt levels. So far, only Bahrain, the UAE, and Qatar have been active sovereign issuers," it said.
Moody's expects that Saudi Arabia's fiscal balance will turn into a deficit in 2015, and Bahrain and Oman's deficits will widen significantly to above seven per cent of their respective gross domestic product, or GDP.
According to the report, GCC governments' fiscal adjustments to lower oil prices will vary, starting with expenditure adjustments on non-strategic investment projects.
Moody's observed that Bahrain and Oman are likely to finance any increase in fiscal deficits in 2015 through sovereign debt issuance in 2015. Saudi Arabia has indicated that it will use its reserve buffer to finance its deficit. Moody's does not expect Kuwait and Qatar to raise their debt levels. While all GCC countries' external current account surpluses will fall in 2015 when compared to levels seen in 2014, the size of the fall will vary, said the report.
"Oman, Kuwait, Saudi Arabia and Qatar will all see significant declines in their current account balances € by around eight per cent points. However, Kuwait and - to a lesser degree Qatar - will continue to show double-digit surpluses; and Kuwait's external break-even oil price will stay the lowest in the region," it said.
Current account surpluses throughout the region have been falling from their peak levels in 2011 and 2012. With the exception of Qatar, current account balances in 2015 should return to the levels recorded in 2009.
"Compared to its 2012 level, we expect Saudi Arabia to post the largest reduction in its current account surplus, at close to 20 percentage points, followed by 17 percentage points for both Kuwait and Qatar. These three countries' energy-related exports to total exports are the highest, at around 90 per cent.
"The UAE, Oman and Bahrain will see their current account balances falling by a lower proportion to their GDP levels, because of their higher share of energy-related imports compared to the other three GCC countries, which means that their import bills benefit from lower oil prices," Moody's said.
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