OREANDA-NEWS. The removal of transport fuel subsidies in the United Arab Emirates may set a positive fiscal precedent for other sovereigns in the region, including those where the public finances are under more pressure, Fitch Ratings says.

The UAE Ministry of Energy said on Wednesday that from 1 August, gasoline and diesel will be linked to global prices. A fuel price committee, including Energy and Finance Ministry representatives and the CEOs of ADNOC Distribution (part of Abu Dhabi National Oil Company) and Emirates National Oil Company, will set prices monthly based on a review of average global prices and operating costs.

Fitch rates two UAE sovereigns - Abu Dhabi (AA/Stable) and Ras Al Khaimah (A/Stable). Fuel subsidies form part of the UAE's federal spending so the new system will have no direct budgetary impact for these sovereigns. But it should result in some indirect fiscal savings to Abu Dhabi, which is a large contributor to the federal budget.

Breakdowns of governments' subsidy spending by product are not always available, which can make it difficult to calculate cost savings from specific subsidy reforms in detail. According to recent IMF calculations, pre-tax energy subsidies in the UAE will amount to USD12.64bn, or 2.87% of GDP, in 2015.

The IMF's data suggest that the impact of cutting fuel subsidies could be larger in some other sovereigns in the region. Among Fitch-rated Gulf Cooperation Council sovereigns, the IMF puts the pre-tax energy subsidies in 2015 at 4.62% of GDP for Saudi Arabia and Bahrain. 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. For example, Bahrain has focused mainly on industrial consumers and Kuwait has partly reversed diesel and kerosene price increases enacted early in 2015 in response to the negative reaction by consumers.

The Kuwaiti experience shows that cutting or removing subsidies can be politically contentious. However, we do not expect adverse political repercussions in Abu Dhabi, which enjoys very high GDP per capita, and good 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.

Lower global oil prices since 2014 have cut fuel subsidy costs, but have also reduced government revenues among Gulf oil exporters. This is evident in our near-term fiscal projections for Saudi Arabia and Bahrain, where we forecast budget deficits of 13% and 10.9% of GDP respectively in 2015. Bahrain is the most fiscally constrained Fitch-rated Gulf oil exporter, and this was reflected in our sovereign downgrade to 'BBB-' last month. A newswire report in early July said that fuel and electricity subsidies would be gradually reduced from August, citing an unnamed government official, but no details were given.

Saudi Arabia, where the widening deficit is partly driven by a new spending package, enjoys substantial fiscal buffers which support its AA/Stable rating. Qatar will move to a small budget deficit (0.9% of GDP) this year. Kuwait will post another double-digit surplus, albeit smaller than in recent years (10.6% of GDP). Qatar and Kuwait are both rated AA/Stable.