Higher oil prices won’t have significant impact on GCC sovereigns

Moody’s expects crude prices to remain volatile

LONDON, April 16: Gulf Cooperation Council (GCC) countries’ creditworthiness will remain driven by government responses to economic, fiscal and external challenges rather than the recent rise in oil prices, Moody’s Investors Service said in a report published this past week.

“Our expectations for the evolution of sovereign credit profiles has not changed with higher oil prices in recent months,” said Thaddeus Best, a Moody’s Analyst and co-author of the report. “The sovereign ratings and outlooks depend on the ability of GCC sovereigns to address structural vulnerabilities and diversify their economies and fiscal revenue sources away from hydrocarbons.”

Moody’s expects oil prices to remain volatile, ranging between $45-65 per barrel, and forecasts average prices of $60 per barrel in 2018 and 2019 before softening to $55 per barrel beyond that. The recent rise in oil prices will lead to a short-term reduction of pressures on GCC governments’ balances sheets by reducing fiscal deficits and slowing the build-up of government debt. Lower current account deficits (or larger surpluses) due to higher hydrocarbon exports will improve external liquidity and slow the drawdown of foreignexchange reserves and sovereign wealth fund assets.

However, the changes in fiscal and external balances, especially after excluding oil and gas revenues, are not significant enough to change Moody’s assessment of fiscal strength or external vulnerability. Moody’s forecasts that Kuwait and Qatar will post budget surpluses of 5.0% (including investment income) and 2.7% of GDP this year respectively, up from 2.8% and 0.8% under Moody’s previous assumption that oil prices would average $55 per barrel.

Conversely, Saudi Arabia, Bahrain and Oman will run large fiscal deficits of 5.8%, 10.2% and 9.4% of GDP respectively, despite the greater tailwind from higher oil prices. Moody’s also forecasts that the UAE will run a small deficit.

Moody’s expects fiscal strength will continue to erode in Oman, Bahrain and Saudi Arabia, reflecting continued accumulation of government debt. Conversely, Qatar and Kuwait are likely to experience improvements in their governments’ net asset positions, while the UAE’s debt metrics should stabilise.

High fiscal break-evens mean that most GCC countries — with the exception of Kuwait and Qatar — would need to cut government expenditure further or raise non-oil revenue in order to stem a further erosion in their fiscal positions. As such, governments’ commitment to sustained fiscal and structural reform aimed at reducing their vulnerability to volatile oil prices will be a key credit driver over the medium-term.

Moody’s believes there is a risk that higher oil prices could slow the reform momentum in the GCC countries. Such slowdown would be most credit negative in Bahrain and Oman, where the fiscal challenges are most acute.

Oil at $60 per barrel will reduce gross borrowing requirements across the GCC. However, sovereign external issuances will remain high in Oman, Bahrain and Saudi Arabia reflecting a limited scope of funding budget deficits domestically.