UAE – Mubasher: It is expected that the removal of transport fuel subsidies in the UAE may have a positive fiscal effect for other sovereigns in the region, Fitch Ratings said in a statement.
Sovereigns whose public finances are under more pressure are likely to benefit from this move, it added.
The UAE’s ministry of energy said on Wednesday that starting 1 August, gasoline and diesel will be linked to global prices. A fuel price committee, including representatives from the energy and finance ministries as well as the CEOs of ADNOC Distribution (a subsidiary of the Abu Dhabi National Oil Company) and Emirates National Oil Company (ENOC) 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,” the ratings agency said in its statement.
A recent report by the International Monetary Fund (IMF) expects pre-tax energy subsidies in the UAE to reach $12.64 billion, or 2.87% of the country’s gross domestic product (GDP) in 2015. IMF data suggests that the impact of reducing fuel subsidies may be larger in some other sovereigns in the region.
Among Fitch-rated GCC sovereigns, the IMF puts the pre-tax energy subsidies in 2015 at 4.62% of GDP for Saudi Arabia and Bahrain, whereas 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,” Fitch noted in its statement, noting that “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.”
