In case oil prices decline to USD 90 per barrel by 2020, the effect will be negative for some GCC economies and neutral for others, Moody’s said in a report.
Moody's underscored that its central oil price scenario for the period until 2020 forecasts a mild decline in oil prices. It has, however, also considered the likely implications of the adverse scenario (USD 90 a barrel oil price) since a number of GCC countries are already suffering from fiscal pressures in the current stable oil price environment.
Moody's said its adverse scenario is based “on the expectation of (1) greater-than-expected new global oil and gas capacity on the supply side; and (2) slower-than-expected commodity demand growth in emerging markets, largely due to the maturing Chinese economy.”
Under such a scenario, sovereign credit quality in the GCC will be impacted to varying degrees, Moody’s warned. Bahrain and Oman are most vulnerable to a potential downward adjustment of their sovereign ratings, given their high fiscal breakeven prices and declining oil production, according to Moody’s.
Despite their large non-oil sectors relative to GCC peers, the UAE and Saudi Arabia will also face reduced fiscal flexibility. Kuwait and Qatar, however, boast “the most headroom and fiscal flexibility to withstand a protracted oil price decline,” Moody’s said.
Policy responses of the affected GCC governments will likely include continued efforts to diversify their economies away from hydrocarbons and to step up fiscal consolidation. Such parameters, however, would have negative implications for corporates and banks, according to Moody’s.
In terms of the impact of sustained oil price decline on GCC corporates, Moody's believes they are vulnerable to weakening public finances given the fact that their respective governments have a dominant role in their economies.
A sustained oil price decline will likely lead to significant adjustments to major parts of some GCC economies, with some exceptions such as utilities, according to Moody’s. It would also cut the availability of subsidies, such as cheap access to feedstock, funding at preferential conditions through the local banking channels, and government support, Moody’s underscored.
A protracted oil price decline will also adversely affect GCC banks, according to Moody’s. Such a scenario will result in lower government deposits and weaker asset quality. This in turn will hit banks' profitability and their ability to generate capital, Moody’s warned.
Any deterioration of sovereign credit quality will, likewise, impact that of the local banks given their exposure to the public sector, the ratings agency concluded.
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