Oil price hike gives GCC near-term relief

dubai - Rise in prices unlikely to have major impact on sovereigns' creditworthiness, says Moody's

The GCC countries will face some near-term relief from the current higher oil prices, but the hike is unlikely to have a major impact on GCC sovereigns' creditworthiness, Moody's Investors Service said.

The ratings agency said the near-term would led to narrower fiscal and current account deficits than it previously expected. "In particular, Kuwait, Qatar and Oman are set to be the main beneficiaries of higher oil prices in the short term, given the larger reliance on oil for government revenues," it said.

Moody's now forecasts a deficit of three per cent of GDP (gross domestic product) for Kuwait, 5.5 per cent for Qatar and 15.1 per cent for Oman in 2016.

On the external side, higher oil prices will benefit Kuwait, the UAE and Oman the most by reducing the current account deficits by an average of four to seven per cent of GDP (with Kuwait facing the largest gains), followed by Qatar, Saudi Arabia and Bahrain, it said.

The UAE, Kuwait and Qatar are the most strongly-positioned GCC sovereigns in terms of both the size of their financial assets compared to government spending and low fiscal break-even oil prices, while Saudi Arabia, Oman and Bahrain have a higher fiscal break-even oil price along with much lower financial assets on which to draw, which contributes to the ratings gap, the ratings agency said.

Over 2016-17, Moody's projects fiscal gains of around four to five per cent of GDP for Qatar and 3.5 to 4.5 per cent of GDP for Oman, and smaller but sizeable gains of 1.5 to three per cent of GDP for Saudi Arabia, the UAE and Bahrain.

It said Kuwait, which relies on hydrocarbon revenues for around 90 per cent of revenues, will be able to generate an additional six to seven per cent of GDP in revenues annually over 2016-17 given higher oil prices, bringing its fiscal deficit down to three per cent of GDP in 2016 and almost zero per cent in 2017, from its previous forecasts of 9.9 per cent and 6.4 per cent, respectively.

The ratings company argued that the GCC sovereigns' credit profiles would remain under stress despite prospects of somewhat higher oil prices in the near term than expected earlier this year.

"While we have revised upwards our near-term estimated prices for oil, our medium-term expectation of 'lower for longer' oil prices remains unchanged. We, therefore, expect GCC countries to continue to face economic, fiscal and external challenges," said Steffen Dyck, a senior credit officer at Moody's.

"Given the significant challenges ahead, government actions to address structural problems exposed by significantly lower oil prices will remain key to sovereign creditworthiness," said Dyck.

Moody's expects oil prices to remain low, moving within a $40 to $60 per barrel range over the medium term. In June, Moody's raised its nearer term oil price estimates for Brent crude to $40 per barrel in 2016 and $45 in 2017.

It pointed out that the oil market's recent rise has been supported by transitory factors, including temporary supply disruptions in Canada and violence in Nigeria which has curtailed production, as well as technical factors such as a weaker US dollar and financial market activity.

"However, global oversupply will continue to depress oil prices for an extended period. Capital spending, which determines future production capacity, has dropped substantially and the US rig count has declined by about 70 per cent. But non-Opec supply remains at historically high levels and the global competition for market share is not over," it said.

Saudi Arabia and Russia have both increased production to their highest levels since the early 1990s, and Iran continues to increase its production.

"The low oil price environment continues to have material, and in some cases profound, implications for economic growth and the balance sheets of GCC sovereigns, which largely rely on oil and gas to drive growth, finance government expenditures and generate hard currency for servicing  foreign-currency-denominated debt," it said.

- issacjohn@khaleejtimes.com