GCC governments are maintaining capital investment spending to support economic activity, despite rising fiscal pressures from falling oil prices, Standard & Poor’s has said in a new report.
The ratings agency said it expects governments in the region to keep capital investment “relatively high” in an attempt to buoy economic growth.
“Even though we forecast GCC economic growth will slow and fiscal deficits will emerge following the more than 50 percent drop in oil prices since June 2014, we expect governments will keep capital investment relatively high as a share of total government spending,” Standard & Poor’s credit analyst Trevor Cullinan said.
However, he added that should oil prices fall much below current expectations and government balances weaken further as a result, GCC governments are expected to increasingly cut back on investment expenditure.
“We believe GCC governments may also look to domestic and international capital markets to diversify their funding sources, support economic growth, build debt capital markets, and slow the depletion of their asset positions,” added Cullinan.
S&P said non-government capital spending is weakening, particularly that of oil and gas exploration companies.
The value of contracts in the Middle East has fallen to $83 billion in the year to August, a 16 percent decline on the same period of 2014, the report said.
Unlike most of the world, GCC governments enjoyed big budget surpluses that let them spend their way out of trouble. Current account surpluses and currency pegs to the US dollar protected the GCC from currency devaluation jitters elsewhere.
But as oil hits new six-year lows, most of those surpluses have vanished. A recent Reuters poll found economists expect all GCC states to post fiscal deficits this year, and half of them to post current account deficits. Arabian Business