Countries in the oil-exporting Gulf will remain heavily dependent on hydrocarbon production for at least the next 10 years as efforts to diversify economies have made limited progress since the 2014-15 oil price shock, Moody’s said.
Source: Reuters
The rating agency said the 2020 pandemic-induced shock to oil demand and prices highlighted GCC sovereigns’ very high exposure to oil market fluctuations as oil and gas accounts for over 20 per cent of gross domestic product (GDP), more than 65 per cent of total exports and at least 50 per cent of state revenues for most Gulf countries.
“If oil prices average $55/barrel … we expect hydrocarbon production to remain the single largest contributor to GCC sovereigns’ GDP, the main source of government revenue and, therefore, the key driver of fiscal strength over at least the next decade,” Moody’s said in a report on Monday.
Alexander Perjessy, VP and snior analyst at Moody’s and the author of the report said economic diversification away from hydrocarbons remains the most frequently stated policy objective in the region but will likely take many years to achieve.
“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 said.
Reliance on the energy sector
The report said reliance on the energy sector will be the ‘key credit constraint’ for the Gulf Cooperation Council (GCC) states and hydrocarbons will continue to drive GCC sovereigns’ fiscal strength, liquidity position and external vulnerability for many years.
Despite ambitious governments’ plans, diversification efforts since 2014 have yielded only limited results and will be held back by lower oil prices. Plans to launch new economic sectors have often overlapped, creating competition among GCC states and constraining room for growth, the report said.
“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,” Moody’s said.
Dubai leads diversification
In the UAE, the level of economic diversification varies significantly among the six individual emirates. Economic reliance on oil and gas is highest in Abu Dhabi (Aa2 stable), which controls most of the UAE’s hydrocarbon resources and derived 41 per cent of its GDP from the extractive sector in 2019, according to the report.
By contrast, the other five emirates, including Dubai and Sharjah (Baa3 negative), have very limited proved hydrocarbon reserves.
“Dubai has achieved the highest level of economic and fiscal diversification, with the extractive sector’s GDP contribution at less than two per cent and government oil-related revenue accounting for less than seven per cent of total revenue in 2019,” Moody’s said.
Non-hydrocarbon revenue share
The report further said the share of non-hydrocarbon revenue in total government revenue has increased for all GCC sovereigns in the past six years. In Saudi Arabia and Bahrain, this increase was very significant. However, a large portion of the increase in the share has been due to the decline in oil revenue and a low initial contribution from non-oil sources.
“The increase in non-hydrocarbon revenue as a share of GDP has been significantly more modest, whereas in some cases, namely in Kuwait, Oman and the UAE, there has been a decline,” Moody’s said
The most significant increase in non-hydrocarbon revenue as a share of GDP was recorded in Saudi Arabia, reflecting the imposition of excise duties and expatriate levies in 2017 and the introduction of the five per cent VAT in 2018, which was subsequently tripled to 15 per cent in July 2020.
“For most GCC sovereigns, non-hydrocarbon revenue remains less than eight per cent of GDP and only a small portion of it is derived from non-oil taxes,” the report said.
Moody’s said non-oil growth in the region is effectively subsidised through zero or very low direct taxes. “Broad income-based taxes – needed to durably reduce dependence on oil – are likely to be implemented only in the longer term,” it said.
