GCC overall fiscal stability 'reasonably well-insulated' against external shocks: Fitch Solutions
February 14 2019 08:45 PM
Fitch Solutions

*Qatar will continue to ramp up investments, partly to prepare for 2022 FIFA World Cup

Most GCC states are able to “lean on their large foreign assets to support currency pegs and temper speculative pressures” on government debt securities, Fitch Solutions has said in a report.

The region's overall fiscal stability is “reasonably well-insulated” against any eventual external shocks, Fitch Solutions said. But it still sees “risks of a sharper-than-expected global growth correction and 'risk-off' sentiment as substantial”.

“Such a development would have negative implications for Mena growth, however, we view the region's overall fiscal stability as relatively well positioned to withstand such pressures,” Fitch Solutions said.

Meanwhile, the more fiscally vulnerable countries in the region would most likely be able to draw on support from the GCC or external allies in the event of mounting pressures, Fitch Solutions noted. In each of these instances, bond yields declined sharply on the back of the GCC aid announcements.

Despite decelerating oil price and revenue growth, Fitch Solutions believes most GCC governments will prioritise the stimulation of economic activity over strict fiscal prudence in the near term.

Many governments will continue to ramp up investment – Qatar is preparing for the 2022 FIFA World Cup – but more broadly to support long-term economic diversification agendas and stimulate job growth. This comes against a backdrop of still-weak non-hydrocarbon private investment.

That said, recurrent spending will in most cases remain the key driver of fiscal expansion as governments look to ease pressures on households' purchasing power brought about by measures such as VAT implementation in certain GCC countries and subsidy cuts.

Some countries in North Africa and Levant stand out as “likely underperformers”, at least in the near term, the report noted.

In Tunisia, recurring protests and mass strikes have pushed the government to halt the implementation of new tax measures in 2019, and on February 7, the authorities also agreed to hike public sector wages despite pledging otherwise under its IMF loan deal.

In Lebanon, Fitch Solutions expects only gradual progress on fiscal consolidation, despite the recent government formation. Policymaking remains exceptionally challenging due to the nature of the country's political system, and the researcher believes this will continue to limit scope for fiscal reforms in 2019 and beyond.

Fitch Solutions forecasts the Mena region’s weighted average fiscal deficit to widen slightly over 2019. It also holds the view that major GCC economies will see deficits widening temporarily as governments pursue expansionary fiscal policies to stimulate growth, despite lower oil revenue gains.

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