The GCC sovereigns’ reliance on hydrocarbons will remain the key credit constraint despite ongoing diversification efforts, Moody’s Investors Service said in a report published on Monday.

“Economic diversification away from hydrocarbons remains the most frequently stated policy objective in the region but will likely take many years to achieve,” said Alexander Perjessy, a senior analyst at Moody’s and the author of the report.

“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,” he added.

Moody’s said that the 2020 pandemic-induced shock to oil demand and prices highlighted GCC sovereigns’ very high exposure to oil market fluctuations. 

For most GCC countries, oil and gas still account for at least 20 per cent of GDP, more than 65 per cent of total exports and at least 50 per cent of government revenue, the ratings agency noted.

‘Despite ambitious governments’ plans, diversification efforts since 2014 have yielded only limited results and will be held back by lower oil prices,’ Moody’s said.

Moody’s expects the diversification momentum to pick up but to be held back by the reduced availability of resources to fund diversification projects in a lower oil price environment and by intra-GCC competition in a relatively narrow range of targeted sectors.

Moody’s said hydrocarbons will continue to drive GCC sovereigns’ fiscal strength, liquidity position and external vulnerability for many years.

‘The importance of hydrocarbons in GDP and government revenue has not changed materially since 2014, having declined mainly due to lower oil prices. 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 in a relatively narrow range of targeted sectors.’

Moody’s warned that unless GCC sovereigns accelerate the adjustment, downward credit pressures from carbon transition will combine with oil price shocks.

‘Given commodity markets’ inherent volatility, government revenue and national income volatility in the GCC will remain higher than in most other regions. Moreover, the implicit social contract between the region’s governments and their citizens will limit the scope for spending cuts – rather, future oil revenue shocks will likely be absorbed through further erosions in government balance sheets,’ it said. 

‘The ongoing global transition to lower carbon emissions will accelerate this trend, although the more highly rated sovereigns in the GCC, which also have some of the lowest oil and gas production costs globally, have in principle some time to adjust,’ Moody’s added.