Hydrocarbons will continue to drive GCC sovereigns' fiscal strength, liquidity position and external vulnerability for many years, Moody’s Investors Service has said in a report.
Trends and cycles in hydrocarbon demand and prices will continue to dominate Gulf Co-operation Council government revenue and exports in the medium term, Moody’s said yesterday.
For most, oil and gas still account for at least 20% of GDP, more than 65% of total exports and at least 50% of government revenue.
“The announced plans to boost hydrocarbon production capacity and government commitments to zero or very low taxes make it unlikely that this reliance will diminish significantly in the coming years, even with some progress in economic diversification, which we expect,” Moody’s said.
Despite ambitious plans, diversification efforts have so far yielded only limited results and will be held back by lower oil prices, Moody’s noted.
The importance of hydrocarbons in GDP and government revenue has not changed materially since 2014, having declined mainly due to 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, it said, downward credit pressures from carbon transition will combine with oil price shocks.
Given commodity markets' inherent volatility, government revenue and national income volatility in the GCC will remain higher than in most other regions.
Moreover, the implicit social contract between the region's governments and their citizens will limit the scope for spending cuts – rather, future oil revenue shocks will likely be absorbed through further erosions in government balance sheets.
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.
“Economic diversification away from hydrocarbons remains the most frequently stated policy objective in the region but will likely take many years to achieve,” noted Alexander Perjessy, a 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,” Perjessy added.