Bahrain, Oman vulnerable to oil prices
The economies of oil-rich Arabian Gulf countries rely heavily on production and prices of crude oil, but some are more vulnerable to market fluctuations than others in the region, according to a ratings agency.
Bahrain is at high risk of being affected by hydrocarbon prices or production, because 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, the kingdom has the lowest share of hydrocarbons sales in its GDP when compared with its neighbors, and is therefore the most diversified economy in the region,” says Trevor Cullinan, Primary Credit Analyst at S&P. “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.”
Oman was able to sustain its oil reserve level at 5.5 billion barrels through utilizing enhanced oil recovery technologies and large upstream investments, but it’s the second most vulnerable economy.
“Oman’s exports are less dependent on hydrocarbons than most other GCC sovereigns. 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 five percent services exports,” says Cullinan.
The S&P report says 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 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,” says S&P.
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.
“On average, hydrocarbon revenues constitute 46 percent of nominal GDP and three quarters of total exports of the six GCC countries,” says S&P analyst Cullinan. “This strong dependence on hydrocarbon revenues appears to be increasing. This is partly a result of high oil prices feeding through to the national accounts data, but also, in our view, because these countries have made only marginal progress in diversifying their economies away from hydrocarbons.”
A sharp and sustained fall in oil prices, to which the majority of liquid natural gas price contracts are also linked, or in hydrocarbon export volumes, would significantly affect economic and financial indicators of oil exporting countries.