Low Crude Oil Prices Hurt GCC Economies, Expect More Subsidy Reforms
$OIL
The Moody’s has downgraded its Crude Oil price forecast and expects Brent Crude Oil to average 53 bbl in Y 2016 and 60 bbl in Y 2017
With Crude Oil prices expected to stay lower longer, Gulf Cooperation Council (GCC) governments’ fiscal and current account balances will remain under pressure, a new report by ratings agency Moody’s Investors Service found.
The report comes after the agency revised its Crude Oil price forecast this week, projecting that recovery will take place in Y 2017, rather than in Y 2016 because of slower growth in demand and faster increase in supply.
It expects Brent Crude to average 55 bbl in Y 2015 and 53 bbl in Y 2016 before gradually recovering to 60 bbl in Y 2017. That’s compared to its previous forecast which saw the prices about 10% higher in each frame
“We expect the fiscal positions of all GCC countries to worsen in 2015, barring significant changes to oil production, planned expenditure or non-oil revenue sources, and project deficits in 2016 for all GCC members except Kuwait,” Moody’s said.
Aggregate nominal hydrocarbon GDP (gross domestic product) for the Gulf states fell by 11% between Y’s 2012 and 2014 to $705-B. The aggregated fiscal surplus also dropped from around 14% of regional GDP to 4% during the same period, the report found.
Moody’s expects that the GCC region will post a combined fiscal deficit of close to 10% of regional GDP in Y’s 2015 and 2016, compared to an average aggregate surplus of almost 9% between Y’s 2010 to 2014.
“We expect that the impact of lower hydrocarbon revenues on GCC public finances will spur policy adjustments in 2016,” said vice president and senior analyst at Moody’s Steffen Dyck. “These could include reductions in subsidy spending and measures to broaden the non-oil revenue base.”
Energy subsidy reforms specifically could free up additional volumes of Crude Oil available for exports and various states have announced limited reform plans.
However, only the United Arab Emirates (UAE) has so far implemented reform of retail fuel subsidies.
“As GCC states face increased financing needs, debt issuance volumes will also rise. Overall government gross borrowing needs will likely average about 12.5 per cent of regional GDP, or around $180bn per year in 2015 and 2016,” said Mr. Dyck.
Bahrain and Oman are the most vulnerable to the downturn in prices because of their very high fiscal break-even Crude Oil prices, the report stated.
Saudi Arabia has room to issue more debt, but widening deficits are weighing on the Kingdom’s credit profile.
“While all GCC countries except for Bahrain have fiscal headroom, spending patterns and government debt levels will be important credit drivers in 2016,” the report stated.
“Kuwait’s credit profile will likely remain the most resilient, followed by Qatar and the UAE,” it added.
By Aarti Nagraj
Paul Ebeling, Editor
HeffX-LTN
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