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28 March 2024

Subsidy may set positive regional precedent: Fitch

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By Staff

The removal of transport fuel subsidies in the UAE may set a positive fiscal precedent for other sovereigns in the region, including those where the public finances are under more pressure, Fitch Ratings said.

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.

According to recent IMF calculations, pre-tax energy subsidies in the UAE will amount to $12.64bn, or 2.87 per cent 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 per cent of GDP for Saudi Arabia and Bahrain. The figures for Kuwait and Qatar are 1.81 per cent and 1.64 per cent 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,” Fitch said.