Report says years of soaring oil prices and comparative fiscal restraint have resulted in substantial asset cushions to protect finances from fluctuations in oil prices
In recent months, global oil prices have been falling precipitously, with the spot price for Arabian Light Crude almost halving between July 2008 and the present. The deteriorating outlook for the global economy and subsequent slowing demand for oil, combined with a strengthening of the US dollar, are two of the main drivers behind the fall.
While this decline in oil prices has led many of the world's oil-importing countries to breathe a sigh of relief, the impact on the world's oil exporters is clearly less benign.
In a new report titled "Gulf Cooperation Council Strong Enough To Take The Pain Of Falling Oil Prices," Standard & Poor's considers what the credit implications are for the oil-exporting countries of the GCC.
"Employing a stress-test approach, we demonstrate just how vulnerable government revenues and external balances are to oil price fluctuations," Standard & Poor's credit analyst Farouk Soussa said. "At the same time, however, our analysis highlights the robustness of GCC government balance sheets in the face of severe negative oil price shocks."
The report employs two scenarios to test the vulnerabilities of GCC fiscal and external positions to oil price changes. The first, a base case scenario, sees average oil prices fall to $79/barrel in 2009, from an average of $108/barrel in 2008, before once again rising modestly from 2010 onwards. The second test presents a reasonable worst-case scenario, namely that oil prices drop a further 50 per cent, to just under $40/barrel, and remain at that depressed level through to 2015.
In the base-case scenario, public finances remain solid for all six GCC countries, with fiscal balances all remaining in positive territory (with the exception of small deficits in Oman and Qatar), and all governments maintaining a comfortable net asset position. On the external side, the import growth assumption drives most countries' current accounts into deficit, but the external asset positions remain substantial.
Under the rigid assumptions of the second scenario, which do not allow for any policy response or secondary effects to falling oil prices, government finances gradually deteriorate to the point where all oil-producing GCC countries, with the exception of Abu Dhabi, run large fiscal deficits, as high as 17 per cent of GDP in the case of Oman.
While noting the limitations of the stress test employed, the report highlights Standard & Poor's key underpinning to its sovereign credit ratings in the region, namely the balance sheet strength of GCC governments.
"Years of soaring oil prices and comparative fiscal restraint have resulted in substantial asset cushions to protect finances from fluctuations in oil prices," Soussa said. "That said, the need to diversify government finances and exports away from hydrocarbons remains a challenge for all GCC countries, and one which remains on the top of policy agendas throughout the region."
