After years of debate, the regions governments are finally cutting subsidies, but the timing is poor
The GCC has been discussing its burgeoning subsidy bill for decades, but fears of popular discontent kept governments from taking action. Not anymore.
Since the beginning of 2016, Saudi Arabia, Bahrain and Oman have all raised fuel prices. It turns out the real impetus needed was oil prices heading towards $30 a barrel.
As usual, the UAE took the lead, liberalising fuel prices in mid-2015. The move was well-received, partly because of the large expatriate population with lower expectations of the government, and partly because falling oil prices brought liberalised prices below the old fixed prices by November 2015.
Dubai and Abu Dhabi also raised utility prices (for expatriates) in 2014 and 2015. Saudi Arabia, Oman and Bahrain plan to follow suit over the next few months.
But GDP growth rates across the region are already expected to slow from 3.3 per cent in 2015 to 2.8 per cent in 2016, according to the Washington-based IMF, as lower oil prices and increased government spending kick in.
The sudden subsidy cuts, implemented together as oil prices head lower for longer, will be another drag on growth.
The effect on inflation may erode living standards and consumption. Consumers will cut back on spending and companies will cut costs and raise prices to compensate. However, corporate profits and bank deposits will still fall.
Listed companies in Saudi Arabia are already reporting the expected impact of the increases in fuel, water and electricity costs to the Saudi Stock Exchange (Tadawul), while others will be looking carefully at the effects.
Saudi dairy company Almarai is projecting a SR500m ($133m) jump in its costs, PetroRabigh projects SR300m, National Industrialization Company (Tasnee) predicts a SR190m financial impact, Saudi International Petrochemical Company (Sipchem) expects SR120m and Saudi Arabian Mining Company (Maaden) SR120m.
These figures may not take into account indirect effects from slowing consumption and economic growth.
The UAE was wise to tackle subsidies early, and has already pushed through the worst side effects. Saudi Arabia, Oman and Bahrain may improve their fiscal position, but at the cost of economic growth, as conditions worsen in 2016.