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Scrapping fuel subsidies ‘will create savings for Gulf’
July 26, 2015, 11:35 am
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Deregulation of transport fuel in the UAE could create fiscal savings elsewhere in the Gulf, according to an analysis by Fitch Ratings. The removal of transport fuel subsidies, announced by the UAE ministry of energy last Wednesday, may set a “positive fiscal precedent”, particularly for sovereigns whose public finances are under pressure, the credit agency said on Sunday.

The UAE announced that gasoline and diesel will be deregulated from August 1 a new pricing policy linked to global levels will be introduced. At present, state subsidies keep gasoline and diesel in the UAE at some of the lowest prices in the world. Motorists pay 47 US cents for a litre of gasoline, less than a third of levels in western Europe, Reuters reported last week.

Energy minister Suhail bin Mohammed al-Mazroui said: “Deregulating fuel prices will help decrease fuel consumption and preserve natural resources for future generations.” 

A fuel price committee, to include representatives from the energy and finance ministries and the CEOs of ADNOC Distribution (part of Abu Dhabi National Oil Company) and Emirates National Oil Company, will set prices monthly based on a review of average global prices and operating costs.

Fitch rates two UAE sovereigns - Abu Dhabi (AA/Stable) and Ras Al Khaimah (A/Stable). It said in a statement this week that fuel subsidies form part of the UAE’s federal spending so the new system will have no direct budgetary impact for these sovereigns. But it should result in some indirect fiscal savings to Abu Dhabi, which is a large contributor to the federal budget.

It cited recent IMF forecasts showing that pre-tax energy subsidies in the UAE will amount to 12.64 billion, or 2.87 percent of GDP, in 2015. These figures, Fitch said, suggest that the impact of cutting fuel subsidies could be larger in other sovereigns in the region. For example, it noted, the IMF puts the pre-tax energy subsidies in 2015 at 4.62 percent of GDP for Saudi Arabia and Bahrain. The figures for Kuwait and Qatar are 1.81 percent and 1.64 percent respectively.

“We think governments in the region understand the benefits of subsidy reform, including both fiscal cost savings, and more efficient resource allocation and energy consumption,” Fitch said. “However, reforms so far have been uneven and incomplete. For example, Bahrain has focused mainly on industrial consumers and Kuwait has partly reversed diesel and kerosene price increases enacted early in 2015 in response to the negative reaction by consumers.

“The Kuwaiti experience shows that cutting or removing subsidies can be politically contentious. However, we do not expect adverse political repercussions in Abu Dhabi, which enjoys very high GDP per capita, and good growth prospects. “Successful implementation in the UAE while oil prices are low could increase public acceptance of subsidy reform elsewhere in the region, boosting the prospects for reform.”

The statement noted that although the global drop in oil prices has cut fuel subsidy costs, it has also reduced government revenues among Gulf oil exporters. As a result, Fitch said it forecasts budget deficits of 13 percent and 10.9 percent of GDP for Saudi Arabia and Bahrain respectively. Qatar and Kuwait are both rated AA/Stable, it said.

Source: Arabian Business

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