High oil reduces GCC borrowing needs; credit problems remain: Moodys

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Over the past week, oil prices have risen to nearly $ 70 a barrel, up from $ 52 at the end of last year. If sustained through the rest of the year, rising oil prices will reduce the immediate government borrowing and external financing needs of GCC rulers, especially for Kuwait, Oman and Qatar, according to Moodys’ Investors Service .

They will also increase the resources available to advance economic diversification projects, the largest rating agency said.

However, Moodys warned that the duration and sustainability of the current recovery remains uncertain and that there is a risk that the prospect of higher than expected oil prices will prompt governments to relax their planned fiscal consolidation efforts for the period. year and increase spending in areas that might be difficult to reverse when oil prices are lower such as social spending and wages.

Despite weak global demand for oil, crude prices have risen in anticipation of a strong economic recovery this year thanks to the global vaccination campaign and broad government stimulus packages, especially in the United States.

The rise in oil prices was also supported by the larger-than-expected production limitation by members of the Organization of the Petroleum Exporting Countries (OPEC), in particular Saudi Arabia which announced in January that it would not would produce only about 8 million barrels of crude oil per day. in February and March (by extending this deadline to April), almost 15% less than the production schedule agreed on last April and 18% less than the average daily production rate during the period 2016-20 .

In February, Opec as a whole produced 15% less barrels of crude oil per day than its average production in 2019.

If maintained through the remainder of the year, rising oil prices will raise government revenues well above our expectations as well as budgeted amounts, which were based on oil price assumptions in the range of. $ 40 to $ 50 a barrel, Moodys said in his review.

For sovereigns with the lowest fiscal break-even points, rising oil prices could even lead to budget surpluses and help reverse some of the large debt increases in 2020, provided the additional revenue is not used to fund. spending higher than budgeted spending, he added.

For example, according to Moodys’ estimate, a $ 20 / bbl increase in the average price of oil could

improve GCC tax revenues (and public balances) by around 5-10% of GDP compared to current forecasts.

Due to the large size of their oil and gas sector relative to overall GDP, the effects would be most pronounced for Qatar, Kuwait and Oman, he said.

However, Moodys warned that the current rise in oil prices could not last long. “While fuel prices will be volatile, occasionally exceeding our mid-term range of $ 45 to $ 65 / bbl, we expect prices to be in the middle of that range over time,” he said. he stated in his review.

In addition, there is a risk that rising oil prices will exacerbate underlying credit weaknesses if GCC governments take advantage of higher than expected oil revenues to increase spending to support the national economic recovery from the shock. coronavirus, and especially if such increases materialize in areas where higher spending will be difficult to reverse, such as subsidies and salaries, he added.

Higher-than-expected oil revenues, Moodys said, resulted in such an overshoot from budgets approved in 2018 in Saudi Arabia, Oman and Bahrain.

Overall, despite a significant decline in oil and gas revenues since 2014, cuts in budget spending since 2014 have been relatively small and far from uniform across the region, highlighting different capacities to adapt to changing conditions. similar shocks in the future, he added.TradeArabia News Service


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