For all the diversification efforts undertaken by the Gulf Cooperation Council (GCC) governments, hydrocarbons will continue to drive their sovereigns’ fiscal strength, liquidity position and external vulnerability for many years, said Moody’s Investor Service in a report.
However, the sovereigns’ very high reliance on hydrocarbons--and therefore, exposure to oil market fluctuations--will remain a key credit constraint, the ratings agency warned.
"Economic diversification away from hydrocarbons remains the most frequently stated policy objective in the region but will likely take many years to achieve," says Alexander Perjessy, a VP-Senior Analyst at Moody's and the author of the report.
“The announced plans to boost hydrocarbon production capacity and government commitments to zero or very low taxes make it unlikely that heavy reliance on hydrocarbons will diminish significantly in the coming years," he added.
Trends and cycles in hydrocarbon demand and prices will continue to dominate GCC government revenue and exports in the medium term. For most, oil and gas still account for at least 20 percent of GDP, more than 65 percent of total exports and at least 50 percent of government revenue, the report said.
Despite ambitious plans, diversification efforts have so far yielded only limited results and will be held back by lower oil prices. “While we expect the diversification momentum to pick up, it will be dampened by reduced availability of resources to fund diversification projects in a lower oil price environment and by intra-GCC competition in a relatively narrow range of targeted sectors,” Moody’s said.
Unless GCC sovereigns accelerate the adjustment, downward credit pressures from carbon transition will combine with oil price shocks. The report added that the implicit social contract between the region's governments and their citizens will limit the scope for spending cuts. Therefore, the future oil revenue shocks will likely be absorbed through further erosions in government balance sheets.
In addition, the ongoing global transition to lower carbon emissions will accelerate this trend, “although the more highly rated sovereigns in the GCC, which also have some of the lowest oil and gas production costs globally, have in principle some time to adjust.”
(Writing by Brinda Darasha; editing by Seban Scaria)
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