GCC fiscal expansion continues in 2019; lower budget deficits forecast for 2020

Fiscal expansion is expected to continue in the GCC in 2019, as fiscal spending in the region is forecast to increase by almost 5.5 percent to reach $605.6bn. GCC countries will continue to focus on their structural reforms, aimed at diversification of their economies via their strategic Vision Plans, revenue optimisation roadmaps, along with large spending plans and mega investments, that could improve growth going forward, KAMCO’s ‘GCC economic update’ released yesterday noted.

In 2020, budget revenues are forecast to improve faster than budget expenses incurred, and contribute to fiscal deficits narrowing y-o-y to $37bn (-2.2 percent of GDP). Current account surpluses are also expected for the GCC over 2019 and 2020, as the region’s surplus is expected to average over 3 percent of GDP over the period.

On Qatar, the research note said, the country’s real GDP in Q1-19 improved by 0.9 percent y-o-y and reached QR202.3bn. Citing Qatar’s official data, the report said the country’s non-oil sector, which accounts for over 52 percent of the real economy, improved by 1.6 percent y-o-y from Q1-18.

Qatar’s current account surplus grew in GDP terms from 9.1 percent of GDP in Q3-18 to 8.6 percent of GDP in Q4-18. Qatar reported a fiscal surplus of QR6.20bn in Q4-18 after posting fiscal surplus of QR1.7bn in Q3-18. The surplus in Q4-18 came despite a 16.2 percent q-o-q drop in revenues.

Q4-18 fiscal surplus came in at 3.4 percent of GDP in Q1-18. Total credit facilities as of May-19 cooled off from the record high levels seen in Q1-19 (QR966.9bn), and declined by 1.2 percent over the period to reach QR 955.7bn.

While KAMCO analysts expect fiscal expansion to continue by GCC governments, they forecast GCC macros to remain broadly accommodative in 2019. The move by the Opec+ countries to rollover the ongoing production cut agreement for another nine months, should keep oil prices relatively stable in their view. This should aid GCC budget finances and their ongoing transformation plans and diversification efforts, aimed at bolstering non-oil GDP growth.

Further an interest rate cut by the Fed during the July FOMC meeting or thereafter would translate into lower interest rates for the GCC region as well, as GCC currencies are either pegged or loosely pegged to the USD. This would reduce borrowing costs in general for GCC economies, as and when they take the bond market route for future debt issues.

In addition, the ongoing inclusion of GCC sovereign and quasi-sovereign debt issuers in JP Morgan’s EMBI index and relative attractiveness of GCC credit should keep debt markets active. Having said that, KAMCO does see a possibility of lower fiscal balances and current account balances for the region in 2019 and 2020 than estimated by the IMF, due to the lower oil production resolution from Opec+ countries.