Fitch: GCC public finances resilient to lower oil prices; fiscal surpluses may shrink

Oil prices have fallen steeply to around $60/barrel for Brent from a high of over $147/b on 3 July 2008. Fitch assumes that Brent will average $60/b in 2009, which is still relatively high by historical standards.

GCC (Gulf Cooperation Council) governments have saved much of the oil price windfall in recent years, but they have also increased spending, pushing up breakeven oil prices. GCC sovereigns' breakeven oil prices vary, depending on their oil wealth and how much oil revenue they choose to spend.

In Saudi Arabia ('AA-'(AA minus)), the general government would break even at USD50/b in 2008; Kuwait ('AA'), which is midway through its April 2008-March 2009 fiscal year, would break even at USD42/b and Abu Dhabi ('AA') at USD31/b. In Bahrain ('A'), the breakeven price is higher. Based on estimated spending for 2008, the budget would balance at USD74/b. Bahrain's oil wealth is smaller than that of its neighbours, but its budget dependence on oil is similar.

With the exception of Kuwait and Qatar, the oil price fall has come as GCC governments draw up their 2009 budgets and as governments were already contemplating a moderation in spending growth. Fitch believes that Abu Dhabi, Saudi Arabia and Kuwait will avoid major cuts to spending plans in 2009, and will be content to run much lower surpluses - in the case of Saudi Arabia and Abu Dhabi in single digits of GDP. The agency believes governments will wait and see what happens to oil prices next year and will then make a more gradual adjustment. For the most part, they have the luxury of being able to do this. Bahrain will have to cut spending to adjust to lower oil prices, and the latest draft of the budget, based on an oil price of $60/b, shows the authorities are prepared to do this.

Fiscal surpluses in the region are much higher than in 1998 - sovereign balance sheets have strengthened and sovereign debt is very low, while assets held in sovereign wealth funds (ADIA in Abu Dhabi, and the KIA in Kuwait) and Saudi Arabia's central bank (SAMA) have soared. Abu Dhabi and Kuwait's government non-reserve external assets exceeded 200% of GDP at the end of 2007, while Saudi Arabia's were 90% of GDP.

Governments can draw on part of these holdings if necessary. Fitch notes that Bahrain, which has domestic government deposits of up to 20% of GDP, but no publicly disclosed non-reserve external assets, has less of a cushion than the larger oil producers.

Poorly-performing global stock markets (the benchmark MSCI World Index fell 40% in January-October) will have caused sovereign wealth funds in the region (SWFs) to suffer capital losses on their equity holdings in 2008. However, on the plus side, there will have been gains on the stock of US Treasuries. SWFs vary in their degree of risk appetite, but hold substantial equity investments alongside US Treasuries and other fixed income assets. Government non-reserve external assets continue to provide essential support to ratings

The report, entitled "GCC Public Finances and Oil Prices", is available on the agency's public website.