Bahrain, Oman most ex­posed to lower oil prices, GCC can with­stand

Financial Mirror (Cyprus) - - FRONT PAGE -

While the six sov­er­eign states in the Gulf Co­op­er­a­tion Coun­cil (GCC) can with­stand the pres­sure of oil prices av­er­ag­ing around es­ti­mates of $80 to $85 a bar­rel in 2015, Bahrain and Oman’s credit pro­files will be the most ad­versely af­fected, be­cause they both ex­hibit a com­bi­na­tion of high fis­cal breakeven oil prices and low re­serve buf­fers.

Moody’s In­vestors Ser­vice said that most of the six GCC sov­er­eigns can with­stand the pres­sures with­out hav­ing to make sig­nif­i­cant pol­icy ad­just­ments but that they would, if needed, likely ad­just their fis­cal poli­cies ac­cord­ingly.

Kuwait and Qatar are the most re­silient, given their very low fis­cal and ex­ter­nal breakeven oil prices, and large re­serve buf­fers. Saudi Ara­bia and the UAE ex­hibit slightly weaker fis­cal fun­da­men­tals and higher ex­ter­nal breakeven oil prices than Kuwait and Qatar.

How­ever, all four

sov­er­eigns

have

sim­i­lar

shock ab­sorp­tion ca­pac­i­ties, given Saudi Ara­bia’s and the UAE’s large non-oil sec­tors and size­able re­serves.

Bahrain and Oman will be more ad­versely af­fected by the lower oil prices be­cause they have the high­est fis­cal breakeven prices and the low­est re­serve buf­fers in the GCC. While the sov­er­eign wealth funds of Kuwait, the UAE, Qatar and Saudi Ara­bia can cover mul­ti­ple years’ worth of gov­ern­ment ex­pen­di­tures, Bahrain’s and Oman’s do not pro­vide that level of cover. Of the two sov­er­eigns, Oman’s over­all gov­ern­ment fi­nances are health­ier, while Bahrain’s ex­ter­nal po­si­tion is stronger.

Moody’s ex­pects that Saudi Ara­bia’s fis­cal bal­ance will turn into a deficit in 2015, and Bahrain and Oman’s deficits will widen sig­nif­i­cantly to above 7% of their re­spec­tive GDP. All GCC coun­tries ex­cept Oman should show cur­rent ac­count sur­pluses in 2015.

The re­port also says that GCC gov­ern­ments’ fis­cal ad­just­ments to lower oil prices will vary, start­ing with ex­pen­di­ture ad­just­ments on non-strate­gic in­vest­ment projects. Slow­ing or even rev­ers­ing the growth in cur­rent gov­ern­ment spend­ing, in­clud­ing sub­sidy re­forms, will be more dif­fi­cult as gov­ern­ments seek to meet so­cial wel­fare de­mands.

As for rev­enue-en­hanc­ing mea­sures, th­ese ef­forts would most likely start with ad­just­ments to ex­ist­ing taxes, tar­iffs and other non-oil rev­enue. The in­tro­duc­tion of new taxes – most likely in­di­rect – would be a last re­sort.

Ac­cord­ing to Moody’s, Bahrain and Oman are likely to fi­nance any in­crease in fis­cal deficits in 2015 through sov­er­eign debt is­suance in 2015. Saudi Ara­bia has in­di­cated that it will use its re­serve buf­fer to fi­nance its deficit. Moody’s does not ex­pect Kuwait and Qatar to raise their debt lev­els.

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