Qatar, Kuwait to withstand oil price fall to $90: Moody’s

By Santhosh V Perumal/Business Reporter

Global credit rating agency Moody’s anticipates a gentle fall in oil prices to $90 a barrel by 2020 but Qatar and Kuwait have the most headroom and fiscal flexibility to “withstand” such a shock.

Moody’s adverse scenario of oil price decline is driven by the possibility of greater-than-expected new global oil and gas capacity on the supply side and slower-than-expected commodity demand growth in emerging markets, reflecting the maturing Chinese economy.

In such a scenario, sovereign credit quality in the GCC (Gulf Co-operation Council) would be affected to varying degrees, with Bahrain and Oman most vulnerable to a potential downward adjustment of their sovereign ratings given their high fiscal break-even prices and declining oil production.

“Kuwait and Qatar have the most headroom and fiscal flexibility to withstand a protracted oil price decline,” Moody’s said, finding that they are “relatively insulated” as their breakeven oil prices have remained below $60, and not even its other stress scenarios anticipate a drop in oil prices to below that level.

“However, Qatar draws its revenue from natural gas exports and, given the gradual decoupling of liquefied natural gas from oil prices and the large new gas supply expected in the coming years, Qatar’s fiscal space could diminish faster than that of Kuwait,” it cautioned.

It also found that Qatar and Kuwait could continue their public spending plans amid the most protracted and severe of price declines.

Therefore, these countries’ banking systems are likely to remain “broadly unscathed” by a protracted decline in oil prices, and are in addition the most explicitly supported by their respective governments, it said.

However, the already high proportion of funding that Qatari banks source from the capital markets will “likely increase” in anticipation of 2022 FIFA World Cup-related activity and investments, it added.

Although the GCC governments would likely draw on their banking system deposits or issue domestic debt, followed by external debt, in view of the protracted oil price fall; Moody’s said Qatar, Bahrain and the UAE, which already have a sovereign yields curve, would be better positioned to finance borrowing needs from external sources.

In an adverse scenario of a protracted decline in oil prices to $90, the GCC governments’ ability to raise revenue by increasing production would be limited, especially when factoring in the Organisation of Petroleum-Exporting Countries as a swing producer.

Depending on their respective level of oil dependency and while drawing on their solid asset positions, “we expect GCC governments’ policy responses to such an adverse scenario will consist of a combination of expenditure cuts and revenue-enhancing measures”, Moody’s said. The current expenditures are particularly sticky and would be difficult to adjust given that fiscal handouts are a key driver of political stability, it added.

Although GCC governments have accumulated considerable assets in their reserve funds for use as cyclical buffers, it is “unlikely that investment income will overtake hydrocarbons as the primary source of fiscal receipts”, it said.