RAM Ratings: GCC economies resilient to oil price decline

Published on 29 October 2014 Global oil prices have been declining since mid-June 2014 due to increased global supply amid moderating global economic growth prospects. Although energy-related revenues form a sizeable portion of the budget and export earnings of Gulf Cooperative Council (GCC) countries, RAM Ratings expects the region’s economic activity to remain steady in the near term. “This resilience stems from the sizeable buffers that the region has employed during periods of volatility in the past. In the near term, we do not expect the deterioration of oil prices to persist so as to materially affect the economic profile of the GCC,” said Esther Lai, RAM’s Head of Sovereign Ratings. The GCC has a long-track record of sizeable fiscal and current account surpluses, which had averaged 14.6% and 19.1% of GDP, respectively, in the past 10 years. This had allowed the region to build up its substantial reserves and provides a bulwark against fiscal or economic shocks. Notably, the reserves available to Saudi Arabia and the United Arab Emirates are estimated at a respective 100% and 283% of GDP. The effectiveness of these buffers was evident in 2009 and 2010 – when energy prices were depressed – as they had spurred macroeconomic recovery in these countries despite the relatively weak external environment. Consequently, we anticipate that the growth trend of GCC nations will remain steady in the near term, given that the region’s considerable buffers are more than adequate to minimise any macroeconomic impact of declining oil prices. Additionally, economic diversification efforts over the years have resulted in a substantial change in the region’s economic structure since 2000. These efforts have increased the GCC’s resilience against shocks in a particular industry. Furthermore, RAM’s base expectation is that the current trend in oil prices will not persist over a period such that it will materially affect the GCC’s fiscal or macroeconomic performance. We anticipate a broad but fragile recovery in most advanced economies and a still-resilient economic performance among the larger emerging markets. This will support oil prices for the immediate term and is in stark contrast with the synchronised global economic downturn in 2009. However, we also note that the accelerating trend in government expenditure in recent years has considerably weakened the GCC’s fiscal position and increased its sensitivity to oil prices. This is especially evident in Bahrain, which had recorded up to 5 consecutive years of fiscal deficits, and other GCC countries, which had seen a persistent increase in the fiscal breakeven price of oil over the same period. While not within our base expectations, prolonged periods of low energy prices will erode the fiscal and external buffers of these countries which anchor their credit strength. RAM Ratings related research: United Arab Emirates – September 2014 Bahrain – August 2014 Kuwait – April 2014 Saudi Arabia – September 2013 Media contact Jason Fong (603) 7628 1103 jason@ram.com.my