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Fuel subsidy cuts will not sway budget deficits in GCC
February 20, 2016, 5:26 pm
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Implementation of subsidy cuts on fuel by Gulf Cooperation Council (GCC) states, while helping to reduce the pressure on public finances from low oil prices, is unlikely to dent the budget deficits of the six-nation bloc, says the latest analysis by Moody’s Investor Service.

The ratings agency noted that savings from increased fuel prices in the six GCC states will average 0.5 percent of gross domestic product (GDP) this year, or around $7 billion, while the estimated deficit will be close to 12.4 percent of GDP.

Elaborating on the issue, analysts at Moody’s pointed out that though recent moves to reform subsidies signal a political willingness to address the damaging effect of low oil prices on budgets, however, they fall far short of the scale of economic and fiscal reform required to achieve budget balance.

According to the rating agency, even if governments decide to link fuel price hikes to global oil prices, the gains from increased fuel prices would be much lower than the expected fiscal deficit, as oil is forecast to remain at around $33 per barrel in 2016. Oil has fallen by 67 percent from mid-2014 levels and around 32 percent from 2015 levels.

However, the agency added that domestic oil consumption has been growing at an average of 6.7 percent annually over the last five years in Kuwait, Qatar, Saudi Arabia and the UAE, and in this regard the price hikes could lead to efficiency gains by reducing distortions caused by artificially low prices.

In addition, Moody's pointed out that GCC governments are looking to cut other current spending and to increase revenue streams in the mid-term. Some of these measures may face stronger resistance in Bahrain, Oman and Saudi Arabia, where per capita incomes on average are lower,  and hence purchasing power impact higher, than in Qatar, Kuwait and the UAE, according to Moody's.

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