The scrapping of fuel subsidies by the UAE in July will help improve the country's consolidated fiscal balance by 0.4 per cent of gross domestic product in 2015 and another 0.6 per cent of GDP next year Moody's Investor service said.

However the ratings agency said it expects the UAE to face a fiscal deficit in 2015 for the first time since 2010 amounting to 2.9 per cent of GDP compared with a surplus of 7.2 per cent of GDP in 2014.

"Fiscal savings from the subsidy reform will be higher in the medium term as we forecast oil prices to rise. In addition linking retail prices to global prices will if sustained lower uncertainty over future transfers. The immediate inflationary impact was moderate increasing consumer prices by about one per cent in August" Moody's said in research note.

Fuel subsidies account for just 24 per cent of the UAE's energy subsidies. About two-thirds of energy subsidies stem from natural gas which is used for electricity generation and in energy-intensive industries.

In January 2015 Abu Dhabi's Regulation and Supervision Bureau hiked prices for water and electricity in the emirate of Abu Dhabi further illustrating the authorities' willingness to transfer an increasing share of production costs to end-users.

Moody's argued that lower energy prices make it easier for governments to link domestic prices to international prices while limiting the negative impact on domestic sentiment and avoiding short-term inflationary pressures.

"The drop in oil prices has put pressure on GCC governments to accelerate subsidy reforms as declining hydrocarbon revenues and sticky spending have reduced fiscal space. However energy subsidy reforms face constraints in the GCC because the public views low energy prices as part of the social contract" it said.

Moody's noted that tax reforms would increase revenues against a backdrop of falling income from exports and from taxes on oil and gas activity. "While Qatar and the UAE authorities have reduced their financial reliance on hydrocarbons they still account for 78.5 per cent of government revenues for all GCC countries" it said. The ratings agency observed that the decline in oil prices since mid-2014 has hurt economic growth and weakened fiscal and current account balances in all GCC states. Growth in the GCC has fallen in line with the slowdown in global oil prices. Aggregate nominal hydrocarbon

GDP for GCC member states dropped 11 per cent between 2012 and 2014. The aggregated fiscal surplus declined to four per cent from around 14 per cent of regional GDP while the combined current account surplus slipped to 14 per cent of GDP from almost 25 per cent.

Moody's suggested that governments could take steps in 2016 to reduce subsidy spending and enhance revenues among other measures. But fiscal balances will be much weaker than they were before 2014 increasing the need for financing and meaning that debt issuance volumes are likely to increase.

The research note said while all GCC countries except for Bahrain have fiscal headroom spending patterns and government debt levels will be important credit drivers in 2016. Bahrain and Oman remain the most vulnerable GCC sovereigns but pressure is building for Saudi Arabia as well. Kuwait's credit profile will likely remain the most resilient followed by Qatar and the UAE.

The UAE saw a lower fiscal surplus of 7.0 per cent of GDP in 2014 down from 10.0 per cent in 2013 due to higher capital expenditures. This spurred the government to increase its fiscal break-even oil price to $78 from $69 in 2013. "We estimate that the UAE will experience a budgetary deficit of 4.1 per cent of GDP in 2015 and a lower deficit of two per cent in 2016 on the back of expected fiscal consolidation measures" analysts at Moody's said.

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