Among the GCC sovereigns, Qatar has announced the most modest spending cuts so far as a measure to offset the potential revenue losses against the exposure to a combination of shocks. Qatar’s spending cuts so far, amount to around 4-5 percent of GDP, while other GCC nations’ cuts are something 7.5 percent to 10 percent, estimates Moody’s.
Over the past three months, GCC governments have announced various measures to offset at least a part of the large revenue losses that Moody’s expects will result this year from the combination of sharply lower oil prices and, in most cases, lower oil production.
A vast majority of the measures announced so far have been on the expenditure side, reflecting the simultaneous shock to the no-noil economy from the coronavirus pandemic and governments’ desires not to place an additional burden on the productive sectors through new or higher taxes and fees.
While GCC sovereigns have provided some targeted support to buffer the economy against the coronavirus shock, most have enacted consolidation measures that significantly exceed the cost of fiscal stimulus with the aim of offsetting expected revenue losses.
In Qatar, cuts include a large reduction in non-priority capital expenditures, which the government had announced in early March. It also includes a more recently announced plan to reduce the salaries of expatriates employed in the government sector by 30 percent, which, according to Moody’s, could reduce spending by close to 1 percent of GDP on an annual basis.
Differences in the policy responses announced by the GCC sovereigns to date have been, to a degree, proportionate to the size of the likely revenue loss in 2020. Because prices of liquified natural gas-Qatar’s main exportare mostly set in long-term contracts and follow oil price movements with a lag, Qatar has some room to delay consolidation measures into 2021, when Moody’s expects the impact of the oil price shock on Qatar’s fiscal revenue to peak.
Kuwait is an outlier, where the rating agency expects the most significant revenue losses, but where the fiscal adjustment has so far been minimal. The differences in policy response are, to a degree, proportional to the sovereigns’ exposure to the shock, but are ultimately a reflection of differences in their institutions and governance strength (fiscal policy effectiveness in particular), which captures their adjustment capacity and indicates how durably lower oil prices are likely to impact their sovereign credit profiles.
It may be recalled Moody’s recently revised down its average oil price assumptions to $35/barrel in 2020 and $45/barrel in 2021, and as a result, expect a very large drop in fiscal revenues for all Gulf Cooperation Council sovereigns.
