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GCC's road to recovery amidst the Covid-19 pandemic

Oil prices have declined massively since March, as Russia and Saudi Arabia could not reach an agreement at that time regarding output cuts.
At the same time, the rapid spread of the coronavirus outbreak around the globe and the restrictions imposed are hurting the non-oil sectors as well, damaging growth prospects. The Gulf Cooperation Council (GCC) was expected to grow at two per cent year-on-year in 2020, with analysts now revising their forecasts and expecting zero per cent. Still, not all of the six Gulf states will be impacted to the same extent as some are rather closed economies, while others are more open.
Looking at fiscal breakeven oil prices for the Gulf, we note that the GCC needs an oil price above $72/barrel on average to balance their budgets, with Saudi Arabia, Oman and Bahrain, standing out in particular with $83, $87 and $92, respectively. Our 12-month oil forecast of $45 per barrel and as a consequence, the six GCC countries are set to report budget deficits, which will be much higher than initially expected. In the case of Saudi Arabia and with oil prices at around $30/barrel the country is set to report a budget deficit that could reach 20 per cent of its GDP.
International reserves can be utilised to help withstand the current economic conditions. The region benefits from strong sovereign wealth funds and foreign currency reserves that could provide support in the short-term. Still, reserves cannot be used indefinitely, as such the lower oil revenues will inevitably lead to increased debt financing - Saudi Arabia has already approved a government debt ceiling of 50 per cent of GDP, compared to 30 per cent previously, opening the door for new issuance of up to $160 billion. In the last weeks Qatar, Saudi Arabia and Abu Dhabi tapped the bond market, extending their debt maturity profiles showing that the market remains open for strong issuers as evidenced by the heavy oversubscription of the bonds.
Among the six GCC countries, Oman and Bahrain are currently standing out as the weakest, with high breakeven fiscal prices, high external debt and low FX reserves. However, Bahrain benefits from a support package from its richer neighbours which came last year in exchange of a fiscal reform programme, which aims to diversify the economy away from oil and also cut spending. In contrast, Oman has delayed fiscal reforms until now, and has so far not asked for support. Still the new sultan seems very committed in reducing the external debt burden and restoring Oman's financial strength, although implementation in the current conditions will make it more challenging.
Saudi Arabia benefits from a large foreign currency asset base that act as buffer against low oil prices, however, the situation is not sustainable and any prolonged period of oil prices in the 30s will generate funding pressures. The United Arab Emirates (UAE) and Kuwait are better positioned to absorb the shock, although their fiscal balance will deteriorate. The UAE's GDP is well diversified, although the impact of the coronavirus will hurt tourism. Still the large external assets certainly provide stability in the short term. Kuwait has also been slow in reforms and will see its budget deteriorate, however, its foreign assets account for over 400 per cent of GDP, providing a significant buffer in times of low oil prices.
Rating agencies have been quick to downgrade the ratings and/or rating outlooks in the region, to better reflect the deterioration of public finances due to the oil price shock and the coronavirus stimulus measures. In the last weeks, a wave of rating changes have materialised among the GCC. Standard & Poor's (S&P) downgraded Kuwait and Oman to AA-/stable and BB-/negative, respectively. For Saudi Arabia, S&P affirmed the A- rating and stable outlook. Regarding Bahrain, S&P revised Bahrain's outlook to stable from positive and affirmed the B+ rating. Abu Dhabi's rating has been affirmed to AA with stable outlooks.
- Eirini Tsekeridou is the executive director, Fixed Income Research, at Bank Julius Baer. Views expressed are her own and do not reflect the newspaper's policy.