Oil price rally will 'vastly' reduce borrowing needs of GCC governments, Goldman Sachs says

Borrowing requirements for the six-member bloc will fall to just under $10bn at $65 per barrel, from $270bn at $45

Kuwait is likely to see the largest positive improvement in its budget balance from buoyant oil prices. Andrew Henderson / The National

The recent oil price rally will have a significant impact on the economic outlook of Gulf states, cutting the borrowing needs of sovereigns in the region, according to Goldman Sachs.

The aggregate GCC net borrowing requirement over the next three years could fall from just over $270 billion with crude at $45 per barrel to under $10bn at $65 per barrel – all else remaining equal, the US investment bank said in a research note.

Kuwait is likely to benefit most from buoyant oil markets. The country could narrow its budget deficit relative to gross domestic product by 15 percentage points this year. At $65, the country would run a deficit of just over 13 per cent, compared to a 28 per cent deficit at $45. Qatar could see a 10 percentage point swing from a deficit of 5 per cent to a surplus of 5.1 per cent.

“Higher oil prices could vastly reduce borrowing for the GCC as a whole in the medium term,” Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, said.

Apart from Kuwait and Qatar, “other regional peers are likely to see a more modest improvement of between 2 and 4 percentage points of GDP relative to official budgeting”, he said.

Oil prices have rallied this year to the highest since the middle of 2019 in early March, after the 23-member Opec+ group extended oil output restrictions of 7.2 million barrels per day, equal to about 7 per cent of supply.

In its March 4 meeting, the group exempted Russia and Kazakhstan, which were allowed to make small output increases. Saudi Arabia, which leads the alliance alongside Russia, also decided to extend its outsize voluntary cut of 1 million bpd until the end of April.

Brent, the international benchmark under which two thirds of the world's oil is traded, and West Texas Intermediate, which tracks US crude grades, have both climbed more than 30 per cent since the beginning of this year.

Brent crude was trading at $68.33 at 6.19pm on Monday, a 32 per cent increase since the start of the year. WTI was at $64.65, up 33 per cent year-to-date.

UBS expects global oil stocks to fall at a faster pace within the next month as Opec+ maintains cuts, which underpins the Swiss bank’s forecast of Brent trading at $75 per barrel and WTI at $72 per barrel in the second half of the year.

Goldman Sachs expects Brent to reach $75 in the second quarter and climb to $80 in the third quarter. Citi forecast that oil will trade above $70 by the end of March.

Bank of America projected last month that Brent would rise at its fastest pace since the 1970s over the next three years, potentially hitting $100 a barrel.

The implications for sovereign balance sheets, creditworthiness and debt markets would be significant, according to Mr Soussa. “But we highlight the likelihood that some of the fiscal space afforded by higher oil prices is likely to be erased by higher spending.”

Sovereigns in the GCC six-member economic bloc are radically transforming their economies to reduce their dependence on oil revenues. Governments have used external borrowings to bridge budget gaps and develop their non-oil economies.

From the perspective of the region’s external balances, Mr Soussa said the region’s exposure to lower oil prices is materially lower than its fiscal exposure, with the average external breakeven oil price a relatively low $50 per barrel.

“For most countries, this gives us comfort with respect to the external outlook and the resilience of currency pegs, even in the event that oil prices recede from current levels.”