Falling oil prices to test GCC economies – S&P

By bne IntelliNews November 11, 2014

The current decline in oil prices to $80 a barrel from $100 a few months ago presents a test to the economies of the six oil-exporting nations of the Gulf Cooperation Council (GCC), Standard & Poor’s said in a new report.

The ratings agency highlighted the key question of whether the GCC nations have benefited from the oil boom period to successfully develop their respective economies so they can “thrive in an environment of less buoyant terms of trade.”

Despite the answer being dependant on the circumstances in each individual GCC country, one recurring theme unites them all, according to S&P.

If the GCC states want to keep their economies resilient to the volatile international commodities market they will need to boost productive job creation and improve the skills and productivity of their young workforces, S&P noted.

"While we see progress in economic diversification in some countries, perhaps most notably in Saudi Arabia, overall the successes are not sufficient to outweigh the structural challenges that need to be tackled," S&P said.

GCC governments are seeking further upgrade their infrastructure to boost wealth creation for the national population and promote diversification of the domestic economy away from the jobs-poor hydrocarbons sector, according to S&P.

An improved infrastructure endowment will generate positive effects for economic development but some obstacles other than infrastructure may upset government’s aspirations. The list includes a sizable skills and employment gap in the GCC region compared to the rest of the world.

The progress in the area of skill upgrading and employment might take several years to take root, but may be a more sustainable path to economic diversification and social peace, given the fact that the labour force is fast growing while government finances could be dented by lower world oil prices, S&P reckoned.

A more diversified sectorial structure of a national economy is a credit positive for sovereign ratings and progress toward that goal could lead to higher ratings, according to S&P.

Given the structural challenges to self-sustained diversification described above, however, S&P believes that the prospect of upgrades for GCC countries may not be soon.

The predominance of stable outlooks among GCC sovereign ratings moreover implies the ratings agency’s assessment that the potential for upgrades or downgrades remains limited in the near term, with the possible exception of Saudi Arabia (positive outlook).

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