Muscat – The 2023 outlook for the GCC economies is positive as high oil prices continue to bolster fiscal positions and provide space for economic reforms, Moody’s Investor Service said in a report.
‘Our outlook for sovereign creditworthiness in 2023 in the GCC is positive. A revenue windfall from still elevated oil prices, despite recent declines, will allow governments to lower debt burdens and rebuild fiscal buffers,’ the rating agency said.
Moody’s assumes Brent crude oil will average around US$95 per barrel in 2023, below the 2022 average of US$100 but significantly above the average of US$57 during 2015-2021.
According to Moody’s, windfall from elevated oil prices will further strengthen government balance sheets in the GCC this year. ‘Although GCC crude oil output is likely to decline in 2023 on strategic production cuts by OPEC+, hydrocarbon revenue will remain robust, allowing most GCC sovereigns to run substantial fiscal and current account surpluses,’ it said.
These surpluses, Moody’s noted, will offer GCC governments a further opportunity to pay down debts, rebuild fiscal reserves, accumulate foreign-currency buffers, and advance structural reforms and diversification projects.
‘Stronger government balance sheets and more diversified economies will increase resilience to future economic and fiscal shocks, while reducing government liquidity and external vulnerability risks. Even if oil prices fell to around US$80 per barrel, we expect most GCC governments would avoid a material rebound in debt burdens and deterioration in debt affordability,’ the rating agency said.
According to Moody’s, oil revenue windfalls and spending restraint will continue to support fiscal positions in 2023.
It said, ‘We expect all GCC governments except Bahrain to post surpluses in 2023, as they did in 2022. In addition to robust hydrocarbon revenue, this reflects our view that expenditure increases in 2023 will be contained compared with previous periods of high or rising oil prices.’
Repaying debt and rebuilding buffers will bolster GCC countries’ overall fiscal strength and resilience to shocks, Moody’s noted.
It said that another year of fiscal surpluses will allow GCC governments to consolidate the reductions in debt burdens and improvements in debt affordability which took place in 2021-2022. In most cases, greater debt affordability will be sustained despite rising global interest rates as relatively long maturities of existing government debt will delay repricing of the outstanding debt stock.
Moody’s further said the GCC governments will also have the opportunity to use their surpluses to rebuild fiscal buffers that were eroded over 2015-2020.
‘In some cases, these buffers are already very large and significantly exceed government debt, lending material support to our assessment of the sovereigns’ fiscal strength. As of 2021, government financial assets amounted to around 340 per cent of GDP in Kuwait, 280 per cent in the UAE, and 185 per cent in Qatar. The assets were more modest, but still large by international comparison, in Saudi Arabia (around 33 per cent of GDP) and Oman (26 per cent of GDP).’
Moody’s said that for all GCC sovereigns, sustained growth in nominal GDP following the large rebound in 2022 will continue to reduce debt-to-GDP ratios. However, in Oman and Qatar, debt burdens will also likely decline further in nominal terms as they did in 2022, as the governments prioritise deleveraging.
Moody’s said, ‘Oman reduced its debt stock by nearly 15 per cent in nominal terms in the year to December 2022 and we expect another, albeit much smaller, nominal debt reduction in 2023. By the end of 2023, we expect Oman and Qatar to have reduced their debt-to-GDP ratios by around 25 and 35 percentage points of GDP, respectively, compared to peaks at the end of 2020.’
By contrast, in Saudi Arabia, Kuwait and the UAE, where government debt is relatively low, Moody’s expect governments to prioritise accumulation of liquid fiscal reserves and sovereign wealth fund assets. Kuwait is the standout, with nearly no debt to repay in 2023 out of its already very small debt stock of only 3 per cent of GDP at the end of 2022.
Moody’s, however, warned that sharply weaker global growth and oil demand are a key risk to the GCC’s positive outlook. It said, ‘If oil prices fell significantly below US$80 per barrel, the improvements in debt burden and debt affordability metrics achieved during 2021-2022 would begin to erode, especially in Oman and Bahrain.’