S&P cuts outlook on Saudi Arabia and Oman as oil rout continues

Saudi Arabia’s rating dropped to stable from positive, while Oman’s outlook dropped to negative from stable.

Weakened oil prices have resulted in Standard & Poor’s – which earlier warned of slower growth across the GCC – downgrading its outlook for Saudi Arabia and Oman.

S&P lowered its long-term outlook for Saudi Arabia’s rating to stable from positive, while Oman’s outlook dropped to negative from stable. The agency currently has Saudi Arabia with a rating of AA- and Oman with a lesser rating of A.

Saudi Arabia’s petroleum sector accounts for 44 per cent of its GDP.

“We view Saudi Arabia’s economy as undiversified and vulnerable to a sharp and sustained decline in oil price, notwithstanding government policy to encourage non-oil private sector growth,” S&P said on Friday.

The non-hydrocarbon sector in Saudi Arabia relies heavily on government spending, which depends greatly on revenue from the oil and gas sector. About 85 per cent of exports and 90 per cent of government revenue stem directly from the hydrocarbons sector, according to S&P.

The IMF said the kingdom needs oil prices at US$106 a barrel next year to fiscally break even, up from $98 a barrel this year.

The revised forecast from S&P for per capita GDP through 2017 was decreased to $23,400 from a June forecast of $25,600 over the period.

Saudi Arabia has implemented a programme to have more nationals enter the labour force, an effort which has driven up wages. In a report on Friday, the International Labour Organisation said that the kingdom’s GDP growth was outpaced by that of wages last year. Real wages increased by 5.6 per cent in 2013 while GDP expanded by 4.0 per cent.

Last month, S&P’s warned that further declines in oil prices could dampen economic growth in the GCC, where about 46 per cent of nominal output derives from hydrocarbons. Unlike most of its neighbours, the UAE does not rely as heavily on oil.

While S&P does not provide a separate sovereign rating for the UAE, it does provide a rating for some emirates.

Abu Dhabi, the emirate richest in hydrocarbons, has an AA rating with a stable outlook thanks to its diversified economy.

Suhail Al Mazrouei, UAE Energy Minister, said the fall in oil prices would not have a “catastrophic effect” on the country, adding that oil constituted only 30 per cent of national GDP.

oil revenue in recent years helped Oman to maintain a strong economic position.

Oil accounted for just less than half of the country’s GDP last year. Now Omani crude oil is forecast to average approximately $80 a barrel over the next two years, down substantially from the S&P’s previous assumption of $95 a barrel.

“This has a negative impact on our assessment of Oman’s fiscal and external position given the country’s high dependence on revenues from hydrocarbons, oil in particular,” the ratings agency said.

Adding to its troubles, most of Oman’s fields are mature, and expensive investment is needed to maintain output and explore for new reserves.

“We now expect the traditional current account surplus, which was equivalent to over 10 per cent of GDP in 2012, to turn to a small deficit in 2017, equivalent to 0.2 per cent of GDP, as oil receipts drop and demand for imports of capital goods remains high,” S&P said.

Brent crude closed at $69.07 on Friday and is down about 40 per cent since June.

* The National, with additional reporting by Adam Bouyamourn

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