Bahrain and Oman are the most vulnerable GCC economies to a sharp and sustained decline in the hydrocarbons market, while Qatar and the UAE are the least vulnerable, according to Standard Poor’s Ratings Services.
SP has published a report assessing the susceptibility of Gulf Sovereigns to concentration risk.
According to SP, Gulf sovereigns’ high and increasing dependence on hydrocarbon revenues is a key vulnerability of their economies and their ratings.
In particular, government budgets have become more susceptible to a sharp drop in oil prices, said the report.
Referring to Saudi Arabia, SP said that although the hydrocarbon sector accounts for slightly less than half of Saudi Arabia’s GDP, the Kingdom is still heavily reliant on hydrocarbon resources both in terms of exports and the fiscal breakeven oil price.
The report said: “The narrow, albeit expanding, economic base, reliance on government expenditure to fuel non-oil sector growth, and high dependence of foreign exchange receipts on oil revenues remain significant. Saudi Arabia has by far the largest population in the GCC at about 30 million, which is about three times that of the second-largest country by population, the UAE.”
As a result, SP said a portion of Saudi Arabia’s non-oil sector has developed without government support in order to meet the retail and housing needs of its population.
The report added: “However, given Saudi Arabia’s sizable population despite having the largest hydrocarbons output and reserves of the GCC countries, its relative position in per capita terms is significantly reduced. Meanwhile, in terms of years of hydrocarbon production remaining at current levels, Saudi Arabia ranks third behind Qatar and Kuwait.”
According to the report, the Gulf countries’ significant oil and gas reserves are a key strength of their sovereign credit ratings. Yet, the concentration of their economies on the hydrocarbon sector could potentially become a significant vulnerability, in Standard Poor’s Ratings Services view. The high income that the oil and gas sector generates, results in general government surpluses, low government financing needs, and net external asset positions for most Gulf Cooperation Council (GCC) countries.
Yet, an economy’s concentration on one sector, especially one that is subject to significant cyclicality of prices or volumes, can be a negative rating factor if sovereigns don’t have substantial financial buffers against a cyclical downturn.
A diversified economy is more likely to be able to withstand a downturn in any one sector.
As a result, policymaking would likely be more effective, economic growth more sustainable, and government and external balances and monetary policy more stable.
Diversification would also likely reduce the risk of a significant depletion of existing financial buffers in the event of a sharp decline in prices or volumes.
SP assesses Bahrain as highly vulnerable to a fall in hydrocarbon prices or production. Based on 2013 data, the oil price already needs to be about $18 higher than the current oil price for the sovereign to achieve a balanced budget. Bahrain is an outlier in the GCC in this respect. Mitigating its dependency, Bahrain has the lowest share of hydrocarbons in GDP among its neighbors, and is therefore the most diversified economy in the region. Financial and government services, as well as manufacturing (mainly aluminum) also provide substantial contributions to its economy.

However, in terms of our sustainability indicators, Bahrain also has the least amount of time to further diversify away from the hydrocarbon sector in order to provide other avenues of support, particularly for its external and fiscal positions in the event of a downturn in this market, SP said.

Oman: Highly vulnerable

Similar to Bahrain, the relatively low lifespan of Oman’s current hydrocarbon production also increases the sovereign’s overall vulnerability, in our view. Nevertheless, through utilizing enhanced oil recovery technologies and large upstream investments, Oman has been able to sustain its oil reserve level at 5.5 billion barrels.
Oman also has the second-highest breakeven oil price among the GCC sovereigns, although this is still an order of magnitude lower than that of Bahrain. The fiscal breakeven oil price is close to Saudi Arabia’s, and the hydrocarbon sector also represents slightly less than half of GDP. However, Oman’s exports are less dependent on hydrocarbons than most other GCC sovereigns, although the dependence remains material. While hydrocarbon exports make up 66 percent of total exports, Oman has 17 percent of its exports classified as other, with 12 percent re-exports and 5 percent services exports.
The government’s eighth five-year development plan (2011-2015) aims to continue to push for diversification by focusing on the development of tourism, industry, and the agriculture and fisheries sector. That said, the pace and scope of diversification in Oman remains largely linked to the performance of the hydrocarbon sector; the government’s public expenditure programs are closely correlated with hydrocarbon revenues. Moreover, competing demands for Omani gas in both domestic and external markets may lead to shortfalls in the domestic market. We note that earlier this year Oman signed a deal for Iran to supply it with natural gas.

Kuwait: Vulnerable

Kuwait appears the most dependent GCC country on hydrocarbon resources in terms of its dominance in GDP and exports. Economic diversification in Kuwait is weak relative to its neighbors. However, although hydrocarbon revenues account for about 80 percent of total government revenues, Kuwait’s fiscal breakeven oil price is the lowest in the region. This would indicate that to some extent the Kuwaiti government has restrained expenditure in relation to the growth in hydrocarbon revenues. In terms of sustainability, Kuwait also has more years of hydrocarbon production at current levels than any other GCC sovereign apart from Qatar.

Qatar: Lower vulnerability

Hydrocarbons account for more than half of Qatar’s nominal GDP and 90 percent of export revenues. Concentration risk related to the economy’s reliance on hydrocarbon resources remains high. However, we expect Qatar to maintain production at currently high levels for the longest period of time of all the GCC countries. At the same time, Qatar’s fiscal breakeven oil price is low and close to that of Kuwait.

UAE: Lower vulnerability
The UAE is ahead of the pack, but in our opinion remains dependent on hydrocarbon revenues. The economy appears the most diversified in the GCC. In our view, Abu Dhabi is still heavily oil-dependent, with hydrocarbons as a proportion of nominal GDP and government revenues reaching 55 percent and 65 percent, respectively (excluding dividends from Abu Dhabi National Oil Company [ADNOC] brings the later ratio to 90 percent). However, the other six emirates of the federation have a significantly smaller hydrocarbon endowment and have developed other industries as a result. Dubai has become a services hub for the region, while Sharjah has a strong manufacturing base, and Ras Al-Khaimah produces significant amounts of construction materials such as ceramics, cement, and glass. The UAE as a whole ranks fourth in terms of its hydrocarbon production lifespan. Nevertheless, the UAE’s fiscal breakeven oil price is relatively high at above $80 per barrel, indicating that to some extent government expenditure growth has been keeping pace with rising hydrocarbon-fueled government revenues.

To determine the GCC sovereigns’ relative dependency on their oil and gas sectors based on the most recently available data, SP said used indicators of sovereign economic, external and fiscal risk:

• As a measure of economic risk, SP assessed and compared the contribution of the hydrocarbon sector to nominal GDP to indicate the level of diversification in the economy.
• To measure external risk, SP examined these countries’ share of hydrocarbon exports in total exports to provide an indication of how much of the external foreign currency that flows into the economy is reliant on the hydrocarbon sector.
• In calculating fiscal risk, SP has taken the International Monetary Fund’s (IMF’s) estimate of the GCC sovereigns’ fiscal breakeven oil price — the oil price at which they can achieve a balanced budget given their level of expenditure. A government that has more prudently managed its expenditure to take account of the volatile nature of hydrocarbons as a revenue source would have a low fiscal breakeven oil price.
SP also takes into account a so-called sustainability factor: how much time a sovereign has available to it before its hydrocarbon revenues are significantly diminished, absent any further oil and gas discoveries or changes to current production levels. SP estimates the number of years at which proven reserves would be depleted if production were to continue at current levels. This allows SP to gauge the urgency of economic diversification or a change in government policy to maintain the existing social contract.
Based on each of these four variables,SP ranked the six GCC sovereigns on a scale of one to six, one being the weakest.
It then took a simple average of the four rankings to indicate the overall vulnerability of each sovereign to the hydrocarbon sector.
Our analysis defines hydrocarbons as both oil and gas.
SP converted production of gas into barrels of oil equivalent (boe) where necessary to estimate overall reserves and production.
SP acknowledged that this analysis does not take into account potential upcoming changes in oil and gas reserves, production, non-oil GDP growth, or fiscal policy.
SP used a single source — the 2014 BP Statistical Review of World Energy — for data on hydrocarbon production and proven reserves in order to provide some consistency of measurement. In addition, we note that measures, particularly with regard to reserves, can vary depending on the data source.