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