The economies of the GCC countries face serious implications from a long-term decline in oil prices, according to a report from the credit ratings agency Moody’s Investors Services.
A fall in the oil price to US$90 a barrel, which Moody’s describes as an “adverse scenario”, would hit Bahrain and Oman hardest, while Saudi Arabia and the UAE would face a mixed outlook. Qatar and Kuwait would be largely unaffected.
A long-term fall to $90 would leave Saudi Arabia and the UAE facing “reduced fiscal flexibility”, while Bahrain and Oman would be most vulnerable to “potential downward adjustment of their sovereign ratings, given their high fiscal break-even prices and declining oil production”.
However, the Moody’s “central scenario” envisages that oil prices will undergo a gentle decline between now and 2020, staying above $100 per barrel, consistent with the decline in the real price of oil. The price of a barrel of Brent crude oil today stands at about $109.
The oil price is generally reckoned to be under pressure because of new sources of energy on the supply side, including United States shale deposits and new finds in Brazil and Central Asia.
On the demand side, many economists believe that declining growth in emerging markets and moves towards a less energy-intensive economy, especially as China develops a bigger domestic consumer market, will increase the downward pressure on prices.
In the worst case scenario, says Moody’s, “the deterioration in government balances would be sharpest in Saudi Arabia, both in nominal terms and as a ratio of GDP, because 80 to 90 per cent of all government revenues would come from the oil sector.
“However, government consumption is not adjusted to those lower oil revenues … and would result in Saudi recording an estimated budget deficit of 3.1 per cent of GDP in 2018,” the report says.
The fall in oil revenues in the UAE would be smaller and the government balance would remain in surplus because the oil sector is comparatively smaller in the more diversified UAE economy, contributing 54 per cent of total government revenue compared with 92 per cent in Saudi Arabia.
“Fiscal break-even oil prices are on an upwards trend,” says Moody’s.
The rate estimated the UAE’s break-even level at about $75, rather lower than that of Saudi at more than $80. Bahrain is the most exposed in the Moody’s analysis, with a break-even price of $120 per barrel.
fkane@thenational.ae
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