Year-on-Year Deficits Brewing in Gulf Economies

Growth forecasts for the overall gross domestic product of Gulf Arab states stands at 2.1 percent for 2019. Gone are the days of breakneck economic development: The region’s sustained real GDP growth averaged around 5.8 percent between 2000 and 2011. Instead, most Gulf Arab states will post fiscal deficits this year, and growth in some economies will decelerate. A concerning mixture of increased government spending, low growth rates, and year-on-year deficits is brewing in Gulf economies. The interrelated trends suggest that while fiscal adjustments in Gulf Arab states have made some headway, these efforts have not been sufficient to offset lower global oil prices and spur desired levels of growth across the region.

Gulf Arab states have made demonstrable progress in reducing their fiscal break-even oil prices – the crude oil price required for these states to balance their budgets. Since the price of the OPEC Reference Basket of crude oil crashed from a high of $110 per barrel (/bbl) in 2014 to a low of $26.5/bbl in 2016, Gulf governments have announced plans to reduce expenditures and generate new revenue through taxes, fees, and subsidy reductions. These initiatives have yielded modest reductions in fiscal break-even oil prices across Gulf states since 2014, a year in which Saudi Arabia, Oman, and Bahrain required oil prices exceeding $100/bbl just to balance their budgets.

Yet public sector budgets remain precariously dependent upon hydrocarbon revenue, which complicates the ability to offset low oil prices through fiscal adjustments. The fiscal break-even oil prices for most Gulf Arab states remain above or near the upper threshold of oil price estimates for 2019. In other words, the projected crude oil prices for 2019 suggest that most states will run deficits this year. Morgan Stanley expects Brent crude to remain around $65/bbl while Goldman Sachs believes that prices may reach a fleeting high of $75/bbl. Other estimates suggest oil prices will fluctuate between $50 and $70/bbl over the next few years.

Source: International Monetary Fund

More worryingly, some governments are spending more year-on-year without realizing higher growth rates. Saudi Arabia boosted state spending by 7 percent with a $295 billion budget for 2019, reflecting the kingdom’s largest budget and paving the way for the sixth consecutive year of budget shortfalls. Despite increased state spending, overall GDP growth forecasts suggest a deceleration of growth from 2.5 percent in 2018 to 1.8 percent in 2019. Non-oil growth is expected to increase to 3.6 percent, which ostensibly bodes well for economic diversification efforts. However, non-oil revenue constitutes a small portion of Saudi Arabia’s total budget revenue – estimates range from 10 to 37 percent.

Oman increased spending by 3 percent in its 2019 budget; however, like Saudi Arabia, the sultanate’s growth is also expected to slow from 2 percent in 2018 to 1.5 percent. Although spending did not rise as much as in the previous year, Oman’s budget will produce a deficit equating to 9 percent of GDP. Total public debt may reach as high as 58 percent of GDP by 2020, but the government has been slow to implement measures to generate new revenue sources, such as the 5 percent value-added tax currently imposed in Saudi Arabia, the United Arab Emirates, and Bahrain.

Bahrain possesses even less fiscal maneuverability than does Oman. Low oil prices since 2014 severely depleted the country’s foreign reserves and pushed public debt to nearly 93 percent of annual economic output. Saudi Arabia, the UAE, and Kuwait extended a $10 billion fiscal aid package on the condition that Bahrain would implement a fiscal program to balance its budget by 2022. As part of this program, Bahrain agreed to introduce a value-added tax in 2019, deepen subsidy cuts, and enact a voluntary retirement plan for government workers. The country’s economy is expected to grow 1.8 percent in 2019, according to the International Monetary Fund, which is a comparable rate of growth to that of 2018.

Kuwait increased spending by 4.7 percent in its 2019 budget and expects a slightly smaller deficit than in 2018. Kuwaiti policymakers aim to drive economic growth by maintaining a relatively high capital expenditure ratio of 17 percent. Wages and subsidies continue to constitute a weighty 71 percent of the country’s budget, down slightly from 73 percent in 2018. This domain of expenditures remains difficult to reform in Kuwait, a country wherein 78 percent of the workforce of Kuwaiti nationals holds public sector jobs and citizens are accustomed to generous benefits from the state. Plans to better manage subsidies and introduce taxes have not materialized, but non-oil growth is expected to reach 3.5 percent by 2020.

GDP growth in the UAE, which has the region’s most diversified economy, is expected to rise modestly from 2.6 percent to 2.8 percent in 2019. Bullish estimates by the International Monetary Fund and the UAE’s central bank see GDP growth reaching 3.7 percent and 3.5 percent, respectively. This projected growth is directly linked to expansionary fiscal policies set in Abu Dhabi. The UAE’s federal budget for 2019 was the highest in the country’s history with a 17.3 percent increase over the previous year. Emirate-level budgets offered additional government stimuli. The Dubai government committed to its largest ever spending plan at $15.5 billion, while Sharjah boosted spending by 10 percent in its 2019 budget.

Where modest growth projections exist, though, other economic concerns lurk in the background. Dubai’s economy expanded at its slowest rate in nine years over the course of 2018, when GDP growth registered 1.9 percent. Private sector companies in the UAE are cutting jobs at their fastest pace in a decade, and Standard & Poor’s estimates that Dubai’s real estate prices could decline by 10 to 15 percent in 2019. The Abu Dhabi government slashed fees related to tourism and the emirate’s airport free zones to attract more foreign tourists and businesses. Meanwhile, the UAE government has launched a debt relief program for citizens and the Ministry of Human Resources and Emiratization plans to create 30,000 private sector jobs for locals in 2019 as part of a new national employment strategy.

Qatar enjoys a relatively strong fiscal position, owing to its small population and abundant natural gas reserves, but the country encountered a major shock following the Saudi-led boycott of its economy. The government boosted state spending to mitigate the boycott’s negative effects and redirected $50 billion from its sovereign wealth fund and other reserves to reinforce its banking sector and exchange rate. Development goals linked to the 2022 World Cup and expanding the country’s public facilities also drove additional state spending. For example, Qatar allocated $200 billion toward domestic infrastructure spending as part of its Qatar National Vision 2030.

More spending, low growth, and recurring deficits are not a recipe for long-term economic sustainability, but this concoction may be a necessary pill to swallow as the hard work of economic reform sets in. Short-term fiscal adjustments in the Gulf Arab states do not negate the need for a longer-term decoupling of state budgets from oil and gas revenue. At the same time, non-oil activities must be more closely linked to state revenue if budgets are to reflect the ambitious aspirations of Gulf Arab policymakers.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.