The rise in oil prices over the next two years will significantly enhance the financial and external positions of the Gulf countries, according to the credit rating agency Moody’s.
However, Moody’s made it clear that the size of the unexpected oil gains that these countries will realize will depend on how well they can use them to address structural credit pressures brought on by their exposure to cyclical fluctuations in global oil demand and prices as well as because of the long-term risks associated with switching to green energy.
Moody’s said that significant oil and gas producers, including the Gulf countries, could boost their production due to the rebound in global oil demand and prices during the recession, which essentially negated the production cuts made by OPEC and its allies in May 2020.
As a result, OPEC producers collectively raised crude oil output from an average of 26.3 million barrels per day in 2021 to 28.9 million barrels per day in July 2022, an increase of 9.7%.
The crude oil production climbed by about 15% in the UAE, Kuwait, and Saudi Arabia within the same period, while it increased by 17.6% in Saudi Arabia.
Bahrain and Qatar are not a part of the coalition led by OPEC, and neither have considerably increased or decreased their output during the past few years.
The year 2022 will see their primary oil and gas production. However, Moody’s stated that governments that heavily rely on the hydrocarbon industry and whose economies and financials are more susceptible to fluctuations in oil prices would benefit more than others from the current high oil prices in terms of the significant reduction in debt burden and sustainability measures. This corroborates the agency’s evaluation of these nations’ financial stability.
However, many Gulf countries, most notably Kuwait, Abu Dhabi, and Saudi Arabia, have already reached very high levels of financial strength thanks to their relatively low debt loads and the availability of substantial financial reserves in the form of assets held by sovereign wealth funds. It will only be possible due to the high level of financial performance.
These governments have also experienced a minor decline in their financial health since 2015, as they avoided significant increases in debt despite some material balance sheet erosion between 2015 and 2020. It was mainly due to the strength of their financial reserves, which allowed them to reduce the need for debt accumulation, particularly in the case of Kuwait, and for a low fiscal breakeven point for the country.
According to Moody’s data, Kuwait and Abu Dhabi have the most significant oil sectors in the rest of their economies. For example, Kuwait’s oil and gas sector contributed more than 41% of the country’s GDP as of 2021. In addition, the agency noted that Kuwait has the lowest debt ratio among the Gulf nations, giving it the most vital financial position.
Other than Qatar, Moody’s predicts that the Gulf countries with high credit ratings will only experience modest increases in economic strength but that the credit factors will remain constant and upwardly constrained due to the sovereigns’ high exposure to the risks of the long-term transition to green energy and their capacity to mitigate these risks over time.