Developments in global oil markets are presenting policymakers in the Middle East and North Africa (MENA) with challenges and opportunities, Moody's Investors Service said in its annual MENA sovereign outlook report.
According to the rating agency, while most net importers are presented with benefits from improving external current account balances and lower fiscal spending on subsidies, lower oil revenues will adversely affect net oil exporters' fiscal and external positions, with varying degrees of pressure across Gulf Cooperation Council (GCC) countries.
"From a government finance perspective, MENA net oil and gas importers will benefit from lower oil prices, which would lead to reduced expenditure on energy subsidies thereby facilitate reform initiatives. GCC exporters, on the other hand, will be affected through lower oil revenues, which will likely lead to cut-backs in public expenditure and in some cases, rising debt burdens," said Steffen Dyck, a senior analyst at Moody's.
According to the rating agency, lower oil prices will likely put an end to four years of large expenditure increases in the GCC, although it notes that the impact on each country varies.
Oman and Bahrain are most vulnerable, while Saudi Arabia's considerable fiscal space will start to shrink given its high break-even oil prices compared with the more resistant GCC sovereigns. Given the limited flexibility to cut back spending in Oman and Bahrain, Moody's expects that debt levels will rise rapidly in both countries, while Saudi Arabia and the UAE will likely tap their financial reserves to address budgetary shortfalls.
Kuwait and Qatar are most resistant to the impact from low oil prices because of their low fiscal breakeven oil prices and large financial reserves, Moody's said. The UAE also has sizeable reserves but the rating agency notes that the emirates' expenditure framework is less flexible than other GCC countries due to large transfers from Abu Dhabi to other emirates through federal services, as well as the expectation that UAE expenditures will rise in 2015.
Regarding external current account balances, Moody's sees Oman as the most vulnerable, expecting a sizeable current account deficit in 2015.
Bahrain, Saudi Arabia and Qatar have external breakeven oil prices that are more or less in line with Moody's oil price forecasts, and their current accounts should remain in surplus or only post small deficits.
The UAE and Kuwait will remain in strongly positive positions, for two different reasons: the UAE is a large exporter of non-oil goods and services compared with other GCC countries, while Kuwait's persistently low public spending moderates imports.
In contrast to GCC oil exporters, MENA hydrocarbon importers will benefit from the low oil price environment in 2015, with current accounts and government fiscal balances set to improve, in Moody's view. Low oil prices will help countries with energy subsidies to reduce these.
Based on Moody's oil price assumptions, combined net hydrocarbon imports could be up to 50% lower on average between 2014-16 compared to the average levels seen in 2011-13, while remittances flows will remain stable. This would help the region's current account balance, which posted an aggregate deficit of $28 bln — around 6% of the region's GDP — between 2011 and 2013. Moody's expects all of the net oil importers — except Egypt — to post lower current account deficits in 2015 compared to 2014.
In addition to oil market developments, Moody's views domestic political and regional geopolitical risks as important factors shaping the sovereign outlook in 2015, which could offset gains from low oil prices or complicate policy adjustments in MENA oil importers and exporters.
