OREANDA-NEWS. Fiscal policy responses by Gulf Cooperation Council (GCC) sovereigns to lower oil prices are likely to be small compared to the loss of revenues over 2015 and 2016, Fitch Ratings says.

The size of the fiscal challenge from cheaper oil varies from country to country, broadly in line with hydrocarbon production per capita.

Some policy responses deployed by other oil exporting-sovereigns are harder to enact, or carry greater risks, for GCC sovereigns. For example, we do not expect any change to exchange rate pegs in the region to ease fiscal adjustments. Pegs are key nominal anchors against inflation, are backed by huge reserves and receive strong political commitment, and the private sector has no experience of exchange rate volatility.

Efforts to boost non-oil revenues have been modest and the varying requirement for fiscal adjustment complicates pan-regional initiatives, such as plans for a GCC-wide value-added tax. Rationalisation of expenditure through better-targeted subsidies and public efficiencies is on several GCC sovereigns' agendas, but can be hard to achieve due to spending rigidities and political opposition.

Capital spending is therefore the main overall source of adjustment among GCC sovereigns, with current projects generally continuing but fewer new projects going ahead. There are exceptions, such as Kuwait, where we expect capex to rise as the improving relationship between the government and parliament supports implementation, and Qatar, which is committed to a high level of capex until 2020, partly in preparation for the football World Cup.

Kuwait and Qatar may have more tolerance for maintaining capex in the face of lower oil prices, as they have the lowest fiscal breakeven oil prices among GCC sovereigns (USD57/b and USD55/b, respectively). We forecast Kuwait to run a budget surplus in both years even with our revised average oil price (Brent) forecast of USD55/b for 2015 and USD60/b for 2016, and Qatar a small (0.6% of GDP) deficit in 2015, although this rises to 5.3% next year.

Elsewhere we expect Bahrain, Oman and Saudi Arabia to record double-digit deficits in 2015, although all three will benefit from some narrowing next year (notably Saudi Arabia, where we project the deficit to drop back to 8.7% of GDP from 16.7%, reflecting some one-off spending this year) as capex is scaled back and oil prices start to recover. But general government debt levels for these three sovereigns will continue to rise in 2016, as borrowing resumes or increases to help finance deficits.