Kuwaiti minister: oil dependence reforms ‘inevitable’

Revenue from hydrocarbons accounts for just under half of Gulf States’ nominal GDP, according to the ratings agency Standard & Poor’s.

From left: Gulf Cooperation Council secretary general Abdullatif bin Rashid Al Zayani, Kuwaiti finance minister Anas Al Saleh and IMF chief Christine Lagarde during the GCC summit in Kuwait on October 25, 2014. Raed Qutena / EPA
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Arabian Gulf states must trim budgets as weakening oil prices threaten government revenues, Kuwait’s finance minister, Anas Al Saleh, warned yesterday.

Speaking at a meeting of Gulf finance ministers in Kuwait, Mr Saleh said that Gulf states must “reduce their dependence on oil” and that “implementing [reforms] had become inevitable”.

“Comprehensive economic reforms, including the reform of imbalances in public finances,” were necessary, Mr Saleh told Reuters.

“[Reform] must be undertaken through strengthening of efforts to diversify away from oil and decrease dependence on oil revenue, which is now inevitable,” he said.

Oil prices tumbled to four-year lows of below US$83 per barrel this month, threatening the fiscal positions of GCC countries.

Every $10 fall in the price of oil cuts Gulf export revenue by $60bn, according to estimates from Capital Economics.

Revenue from hydrocarbons accounts for just under half of Gulf States’ nominal GDP, according to the ratings agency Standard & Poor’s.

The UAE’s fiscal break-even price is $81.3 per barrel, according to S&P.

UAE budgets have been expanding slowly over the past few years, with federal spending of Dh46 billion planned for this year, up from Dh43bn in 2010.

Bahrain’s fiscal deficit, equal to 5.7 per cent of its GDP, is likely to grow as oil revenue falls, while the IMF predicts that Oman will run a deficit equivalent to 1.8 per cent of its GDP in 2016.

Even if Gulf states run fiscal deficits, however, foreign-asset holdings built up by government sovereign wealth funds, and low levels of public debt could help them maintain current spending levels for some time.

“Lower oil prices shouldn’t cause too many problems for the Gulf economies thanks in large part to their relative prudence over the past decade,” said Jason Tuvey, an emerging markets economist at Capital Economics.

“Even so, weaker growth in oil production and a less supportive fiscal policy mean that the Gulf economies are likely to slow over the coming years, and growth rates of 3 to 4 per cent rather than 6 to 7 per cent will become the new norm,” said Mr Tuvey.

Kuwait has announced plans to cut energy subsidies, with further cuts under consideration. Oman is also considering reductions in petrol subsidies.

* With agencies

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