Gulf countries’ large dependence on hydrocarbon revenues is a key vulnerability of their economies and their ratings, Standard & Poor’s Ratings Services has said.
In a report titled Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk? , it said their high concentration on this sector, in which prices and volumes are highly cyclical, is a credit risk.
The significant oil and gas reserves and the high income that the oil and gas sector generates results in general government surpluses, low government financing needs, and net external asset positions for most Gulf Cooperation Council (GCC) countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the U.A.E.
“We view the GCC states’ dependence on the oil and gas sector as a key vulnerability, particularly about the accumulation of significant financial buffers, should there be a sharp and sustained decline in the oil price or in hydrocarbon export volumes,” said Standard & Poor’s credit analyst Trevor Cullinan.
“A sharp and sustained fall in the oil price or in hydrocarbon export volumes would significantly dent their economic and financial indicators.”
On average, hydrocarbon revenues constitute 46 per cent of nominal GDP and three-quarters of total exports of the six GCC countries.
Furthermore, this strong dependence on hydrocarbon revenues appears to be increasing, it said.
“This is partly as a result of high oil prices feeding through to the national accounts data, and also, in our view, because these countries have made only marginal progress in diversifying their economies away from hydrocarbons.
“Nevertheless, some GCC countries appear more vulnerable than others to a drop in oil prices, according to Standard & Poor’s analysis of certain economic, external, and fiscal risk indicators.
“We assess Bahrain and Oman as highly vulnerable to a fall in hydrocarbon prices or production. They have the highest fiscal break-even oil prices among GCC states.
Based on 2013 data, for Bahrain the oil price needs to be $18 higher than the current oil price for the sovereign to achieve a balanced budget, the report said.
Bahrain and Oman also have the least amount of time available before their hydrocarbon revenues would be significantly diminished, in the absence of any further oil and gas discoveries or changes to current production levels, at 11 and 21 years, respectively, it added.
Meanwhile, Qatar and the U.A.E. are the least vulnerable to a sharp drop in oil prices. Although hydrocarbons account for more than half of Qatar’s nominal GDP and 90 per cent of its export revenues, it nevertheless has available 100 years of hydrocarbon production at current levels and a low fiscal break-even oil price, it said.
The U.A.E. economy, although dependent on hydrocarbon revenues, appears the most diversified in the GCC, with oil and gas contributing only 31 per cent of its total exports.
S&P’s Rating Actions are determined by Ratings Committee though this ‘commentary’ has not been determined by it, the report said.
“The opinions expressed in this article do not represent a change to or affirmation of Ratings Services’ opinion of the creditworthiness of any entity/entities (named or inferred) or the likely direction of ratings”, the report added.
