Moody's warns Gulf states over oil price decline

Rating agency says Bahrain, Oman will be hardest hit during long-term decline in oil prices
By Andy Sambidge
Fri 07 Mar 2014 10:15 AM

The effects on the economies of Gulf Cooperation Council (GCC) countries would be negative to neutral under an adverse scenario in which oil prices decline to $90 per barrel by 2020, according to Moody's Investors Service.

In a new report, the rating agency said Oman and Bahrain would be most at risk of such a scenario while the UAE and Saudi Arabia would also face reduced "financial flexibility".

It added that Qatar and Kuwait would be best placed to deal with a long-term decline in oil prices.

While Moody's central oil price scenario for the period until 2020 anticipates a gentle decline in oil prices, the rating agency said it has also considered the likely implications of the adverse scenario because a number of GCC countries are already experiencing fiscal pressures in the current stable oil price environment.

Moody's adverse scenario is based on the expectation of greater-than-expected new global oil and gas capacity on the supply side; and slower-than-expected commodity demand growth in emerging markets, largely due to the maturing Chinese economy.

"Under such a scenario, sovereign credit quality in the GCC would be affected to varying degrees, with Bahrain and Oman most vulnerable to a potential downward adjustment of their sovereign ratings, given their high fiscal breakeven prices and declining oil production," said Thomas J Byrne, co-author of the report.

"The UAE and Saudi Arabia would, despite their large non-oil sectors relative to GCC peers, face reduced fiscal flexibility. Kuwait and Qatar on the other hand have the most headroom and fiscal flexibility to withstand a protracted oil price decline."

Moody's said it anticipates that the policy responses of the affected GCC governments are likely to include continued efforts to diversify the economies away from hydrocarbons and to step up fiscal consolidation, which would have negative implications for corporates and banks.

In terms of the impact of a protracted oil price decline on GCC corporates, Moody's said it believes they are vulnerable to weakening public finances because the respective governments play such a dominant role in their economies.

"A sustained oil price decline would likely result in significant adjustments to major parts of these economies, with some exceptions such as utilities," said Martin Kohlhase, co-author of the report.

"It would also reduce the availability of subsidies, such as cheap access to feedstock; funding at preferential conditions through the local banking channels; and government support."

Furthermore, Moody's said it anticipates that a protracted oil price decline would adversely affect GCC banks.

"A drop in oil prices would result in lower government deposits and weaker asset quality, which would in turn hit banks' profitability and their ability to generate capital. Any deterioration of sovereign credit quality would also affect that of the local banks given their exposure to the public sector," added Khalid Howladar, co-author of the report.

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