MANAMA: Bahrain’s budget is seen nearing balance if oil prices continue to average $85 a barrel next year, says Fitch Ratings.
Commenting on the resurgence in oil prices, the US-based ratings agency said yesterday that this would lead to a marked improvement in GCC fiscal and external balances in 2021, alongside reform momentum that has taken hold to varying degrees since 2014 in response to oil price volatility.
Fitch’s scenario analysis estimates that GCC budgets, except in Bahrain, would move into surplus if oil prices were to average $75 a barrel in 2022.
At the current price of $85/bbl, Bahrain’s budget would also be close to balance.
In a stress scenario of $45/bbl on average in 2022, fiscal balances would be in deficit across the region. This would create the most pressure for Bahrain and then Oman.
Fitch estimates that at $65/bbl, gross domestic and foreign issuance in GCC sovereigns would be half of what it would be with oil prices at $45/bbl.
A gradual reconfiguration of fiscal policy in the GCC started with the oil price slide in late 2014.
The firm expects further fiscal reforms, especially in the lower-rated GCC sovereigns, given uncertainty over the outlook for oil prices in the context of the push to limit global hydrocarbon demand and a greater focus in the Gulf on underlying fiscal performance stripped of the impact of oil revenue.
However, the longer that higher oil prices continue, the greater the risk of looser fiscal policy.
The challenge of maintaining focus on fiscal adjustment is magnified by the policy dilemmas Gulf states face as they seek to achieve long-term fiscal sustainability, while also delivering good economic outcomes for citizens and promoting economic diversification.
Furthermore, trends in non-oil economic activity in the GCC typically are linked in part to trends in government or wider public-sector spending.
Governments may maintain fiscal consolidation on budget, while broader public-sector spending increases, leading to a build-up of contingent liabilities.
Meanwhile, MUFG Bank, Japan’s largest lender, has listed Bahrain alongside Oman, Nigeria and Saudi Arabia as the four countries that stand to gain the most from higher commodity prices.
It says higher commodity prices evidently benefit commodity exporters, counting the kingdom among moderately dependent countries with its net exports amounting to 10-20pc of GDP.
Economies that have a current account deficit in a lower price environment stand to gain more from higher prices than those with a surplus, MUFG explains.
avinash@gdn.com.bh
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