GCC 2020 expansionary budgets under threat from oil price slump due to Covid-19 spread

Oil prices have been declining over the past two months following the outbreak of coronavirus in Wuhan, China, which is now spreading globally. The spreading of the disease is expected to have a substantial effect on global GDP and oil prices. The persistent weakness in oil prices is worrisome mainly for the GCC region as oil is the major source of revenue. Gulf countries have already announced their budgets for 2020, assuming oil price at USD55–60 per barrel. With oil prices currently way below the GCC governments’ estimation, the deficits of these countries could widen toward the end of 2020. However, the constant efforts of GCC countries to diversify their economy towards the non-oil sector over the past many years would provide some cushion in this challenging environment.

Crude oil prices have fallen since January 2020 as the news of coronavirus spreading widely came in. Measures taken by OPEC and allies to rebalance the market by extending production cuts did little to arrest the decline in prices and therefore, these oil exporting countries are planning for further production cuts. The correlation is quite straight—China and other countries in Asia-Pacific are among the largest consumers of oil; any slowdown in economic activity (factories shutdown, curbs on transportation) would dent demand. The direct impact of persistent low oil prices would be evident on the budgets of GCC countries that were based on an anticipated price range of USD55–65 per barrel when prepared in Q4 2019. The reserves as well as strategies to absorb wider deficits resulting from lower oil revenues differ from country to country in the GCC region; some may be compelled to curtail expenditure. The silver lining is the ongoing push to diversify from oil through initiatives to boost non-oil sectors coupled with the reforms implemented over the past few years to curb wasteful expenditure and subsidies.

Sustained weakness in oil prices to widen GCC budget deficit
GCC countries’ budgets are directly corelated with oil prices as oil accounts for about 60–80% of total revenue. Most GCC countries had announced their budgets for 2020 when prices were hovering at USD56–60 per barrel. However, the outbreak of coronavirus in China has caused oil prices to plunge, falling about 11.1% MoM in February to USD51.1/barrel.

Exihibit:1 Oil price forecast vs GCC budget oil assumption

Source: media article, ministry of finance

Currently, oil price future is trading in the range of USD49–53 barrel for 2020. The epidemic is expected to have an indirect but substantial impact on GDP growth in the GCC region and, therefore, its budget. With oil prices way below the estimation of GCC governments, the deficit in these countries is expected to widen further in 2020. To plug the gap, the region either needs to increase debt borrowings and/or introduce various taxes. GCC economies may also have to curtail their expansionary budgets to reduce the pressure on the overall region’s budget. Based on the IMF’s data for October 2019, Saudi Arabia’s gross debt to GDP was about 23.1% for 2019E, while that of the UAE and Kuwait was about 20.1% and 15.2%, respectively, indicating room for increase in debt. However, gross debt to GDP was relatively higher for Oman (59.9%) and Qatar (53.1%).

Diversification to non-oil sector likely to provide some respite
Most GCC countries have been working relentlessly to diversify their economy over the past many years as persistent weakness in oil prices has impacted their revenues. Despite diversification resulting in wider budget deficits, the countries have pursued it as they look to hedge against the volatility in oil markets globally. In line with the objective, Saudi Arabia has introduced Vision 2030, while the UAE implemented Vision 2021. Oman launched Vision 2040, while Qatar and Kuwait implemented Vision 2030 and Vision 2035, respectively. Although economic diversification is a complex and long-drawn process, in the long term, it is expected to trim the budget deficit by providing a cushion against the uncertainties in global oil markets.

The chart below depicts the increasing contribution of non-oil revenue which is only expected to grow, going forward. We have not given the non-oil revenue percentage for the UAE due to availability of limited information. However, as per the UAE’s Minister of Economy, the sector accounts for 70% of its GDP. Sectoral contribution has increased 14% in the last four years and the government aims to take it to 80% by 2021.

Exhibit 2: Increase in non-oil revenue percentage

Source: media article, ministry of finance

Highlights of 2020 budget
GCC countries have presented expansionary budgets for 2020. KSA announced the second highest budget on record, while the UAE announced its largest budget since the time the country has been established. Qatar declared its biggest budget in the last five years.

Most GCC countries are expected to report higher deficit or lower surplus for 2020 vis-à-vis 2019, considering the anticipated lower oil revenues. More importantly, they are expecting more revenue from non-oil sectors.

Exhibit 3: Deficit to widen for most GCC countries (USD bn)

Source: Media article, Ministry of Finance;* fiscal year 20-21

Conclusion
The fall in oil prices over the first two months of 2020 has disturbed the budgetary calculations of GCC countries that prepared their budgets for 2020 in Q4 2019 on an anticipated price range of USD55–65 per barrel. This may lead some to take a relook at their expenditure plans or raise more debt. Despite the predicament the decline in oil prices has created, GCC countries remain committed to economic diversification and have accordingly allocated funds to boost growth. The budgets are based on a strategic approach similar to that adopted for 2019—prudent increase in expenditure targets. Although sustained weakness and volatility in oil prices would continue to pose challenges to the 2020 budgets of GCC countries, strategic steps to diversify the economy (such as introduction of various taxes and promotion of private-public partnership) would support employment and social development in the near term.