Regional governments understand benefits of subsidy cuts, but reform efforts have been ‘uneven and incomplete’
The UAE’s decision to cut fuel subsidies may set a precedent for other GCC countries, particularly those facing the most strain on public finances, according to Fitch Ratings.
The Ministry of Energy last week announced it would scrap subsidies for fuel, so that gasoline and diesel would be linked to global prices starting August 1. The UAE government said the move would be beneficial to both the environment and the economy, as the country looks to move away from oil dependence.
As per recent IMF calculations, pre-tax energy subsidies in the UAE will amount to $12.64 billion, or 2.87% of the GDP in 2015, Fitch Ratings said in a statement.
Data from the IMF suggests, however, that the impact of cutting fuel subsidies could be more significant in other countries in the region. Among Fitch-rated GCC sovereigns, the IMF puts pre-tax energy subsidies at 4.62% of GDP for Saudi Arabia and Bahrain in 2015, while the figures for Kuwait and Qatar are 1.81% and 1.64% respectively.
“We think that governments in the region understand the benefits of subsidy reform, including both fiscal cost savings, and more efficient resource allocation and energy consumption. However, reforms have so far have been uneven and incomplete,” the statement said.
For instance, Bahrain has mainly focused thus far on industrial consumers, while Kuwait has partly reversed recently enacted diesel and kerosene price hikes in response to consumer opposition.
The Kuwaiti example shows that the issue of fuel subsidy cuts can be politically contentious, Fitch Ratings noted. The agency, however, does not expect such repercussions in Abu Dhabi on account of its high GDP per capita and positive growth prospects.
“Successful implementation in the UAE while oil prices are low could increase public acceptance of subsidy reform elsewhere in the region, boosting the prospects for reform,” the statement said.
The global decline in oil prices has cut fuel-subsidy costs but have also reduced government revenues for GCC oil exporters, which in turn is expected to cause budget deficits this year. This is evident in near-term fiscal projections for Saudi Arabia and Bahrain, forecast to see budget deficits of 13% and 10.9% of the GDP respectively this year, Fitch Ratings said.