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UAE fiscal balance to remain in surplus with oil at $75: Moody’s

The rating agency said a revenue windfall from elevated oil prices, despite recent declines, will allow most GCC governments to lower debt burdens and rebuild fiscal buffers

Fiscal balances of the UAE and Qatar will remain in surplus under an average oil price of $75 per barrel in 2023, Moody's said on Wednesday as it affirmed a positive creditworthiness outlook for GCC sovereigns in 2023.

The rating agency said a revenue windfall from elevated oil prices, despite recent declines, will allow most GCC governments to lower debt burdens and rebuild fiscal buffers.

According to estimates by analysts, the fiscal breakeven oil price for the UAE in 2022 was $60.4 per barrel.

A further boosting of fiscal buffers would further unwind the GCC countries’ balance sheet erosion that took place during 2015-20 and increase their capacity to deal with future shocks, Moody’s said in its report.

The rating agency said fiscal balances would remain in surplus in UAE and Qatar in an average oil price scenario of $75/barrel but turn into moderate deficits in Kuwait, Oman, and Saudi Arabia. For Bahrain, a lower oil price would result in a significantly higher fiscal deficit.

The rating agency maintained that sharply weaker global growth and oil demand are key risks to the positive outlook. “If oil prices fell significantly below $80/barrel, the improvements in debt burden and debt affordability metrics achieved during 2021-22 would begin to erode, especially in Oman and Bahrain.

“Higher hydrocarbon revenue will also provide ample financial resources to support economic diversification projects that, if effective, will reduce GCC sovereigns' heavy economic and fiscal reliance on hydrocarbons and high exposure to longer-term carbon transition risks,” said Alexander Perjessy, vice-president and senior credit officer at Moody’s.

Perjessy said high oil prices would additionally support robust current account surpluses and limit external financing pressures for lower-rated GCC sovereigns.

“A deeper-than-expected global slowdown, eroding hydrocarbon demand, and escalation of regional geopolitical tensions are the key sources of downside risk,’’ he said. In its report, Moody’s expects all GCC governments except Bahrain to post surpluses in 2023, as they did in 2022.

According to Oxford Business Group, the windfall from oil revenue has generated more fiscal flexibility and external balance surpluses, allowing GCC members to continue to fund their diversification efforts while improving diplomatic relations have opened the possibility for enhanced regional and global integration.

GCC members are in a strong position heading into the new year. High energy prices in 2021 helped the Gulf’s largest economy, Saudi Arabia, forecast its first budget surplus in eight years for 2022.

In nominal terms, Moody’s expects total spending across GCC sovereigns to increase by only around 1.5 per cent, compared with an annual average of around 13 per cent in 2011-14 and around 8.0 per cent in 2022. In inflation-adjusted terms, spending will decline.

The sovereigns that will benefit most from high oil prices are those with the greatest hydrocarbon revenue relative to GDP. These include Kuwait (A1 stable, 42 per cent), Oman (30 per cent), Qatar (28 per cent), and Saudi Arabia (22 per cent), Moody’s said.

Moody’s report noted that both Oman and Bahrain have made some progress in the past few years in reducing their non-hydrocarbon trade deficits by expanding domestic non-oil exports (especially aluminium for Bahrain and plastics for Oman) and curbing imports (the latter being partly due to fiscal spending cuts), however, their liquidity and external financing will remain sensitive to oil fluctuations.

— issacjohn@khaleejtimes.com