Moody's: Delayed oil price recovery could weigh on GCC sovereign credit profiles

With oil prices expected to stay lower for longer, GCC governments' fiscal and current account balances will remain under pressure, says Moody's Investors Service in a report published today.

"We expect that the impact of lower hydrocarbon revenues on GCC public finances will spur policy adjustments in 2016. These could include reductions in subsidy spending and measures to broaden the non-oil revenue base ," says Steffen Dyck, a VP-Senior Analyst at Moody's.

Energy subsidy reforms are among the fiscal options available to adjust to lower oil prices, which in turn could free up additional volumes of oil available for exports, says Moody's. Various states have announced limited reform plans, but only the UAE has implemented reform of retail fuel subsidies.

Nonetheless, the rating agency projects that all GCC countries except Kuwait will again run fiscal deficits in 2016. It expects that the GCC region will post a combined fiscal deficit of close to 10% of regional GDP in 2015 and 2016, respectively, compared to an average aggregate surplus of almost 9% in the years 2010 to 2014.

"As GCC states face increased financing needs, debt issuance volumes will also rise. Overall government gross borrowing needs will likely average about 12.5% of regional GDP, or around USD180 billion per year in 2015 and 2016," says Dyck.

Bahrain and Oman are most vulnerable to the downturn in oil prices, because of their very high fiscal break-even oil prices, according to Moody's. It notes that while Saudi Arabia has room to issue more debt, widening deficits are weighing on the kingdom's credit profile.

The oil price drop caused aggregate nominal hydrocarbon GDP for the six GCC member states to fall by 11% between 2012 and 2014, to $685 billion.

Moody's expects that low oil prices will continue to affect oil-exporting countries in the coming years, after revising its oil price forecasts on 19 October, projecting that the oil price recovery will take place in 2017 rather than in 2016. It expects that Brent crude will average $55 per barrel in 2015 and $53 per barrel in 2016 before recovering only gradually to $60 per barrel in 2017.