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Solvency will depend on sudden oil gains
KUWAIT CITY, September 15: The rating agency “Moody’s” has indicated that the rise in oil prices over the next two years will lead to a significant improvement in the financial and external positions of the Gulf countries, reports the daily Al-Rai . However, the agency clarified that the substantial improvements that will occur in creditworthiness will depend on the size of the sudden oil gains these countries will reap and their use to deal with structural pressures on credit caused by their exposure to cyclical fluctuations. global oil demand and prices, and because of the risks of transitioning to green energy in the long term.
The agency added that the recovery in global oil demand and prices from the recession has allowed major oil and gas producers, including the Gulf states, to increase production, offsetting most of the cuts in production implemented by the Organization of the Petroleum Exporting Countries (OPEC) and its allies in May 2020.
As a result, OPEC producers jointly increased crude oil production to 28.9 million barrels per day in July 2022 from an average of 26.3 million barrels per day in 2021, an increase of 9 .7%. During the same period, the United Arab Emirates and Kuwait increased their crude oil production by almost 15%, while Saudi Arabia’s production increased by 17.6%. Bahrain and Qatar are not members of the OPEC-led coalition and have not significantly reduced production in recent years, nor significantly increased production.
Their major oil and gas production will take place in 2022. On the other hand, Moody’s said that governments whose economies and finances are more sensitive to fluctuations in oil prices due to their heavy reliance on the hydrocarbon sector are those who will benefit more than others from the current high oil prices in terms of significant improvement in debt burden and sustainability measures. This confirms the agency’s assessment of the financial strength of these countries.
However, for many Gulf countries, including Kuwait, Abu Dhabi and Saudi Arabia, their financial strength is already very high due to relatively low indebtedness and the availability of large financial reserves in the form of assets held by sovereign wealth funds, which will limit the extent of strong upward pressure on solvency only Due to the high level of financial performance.
These governments have also experienced the least deterioration in their financial strength since 2015, as despite some significant balance sheet erosion over the 2015-2020 period, Kuwait, Abu Dhabi and Saudi Arabia were able to avoid a significant increase in their debt, mainly due to the strength of their financial reserves which allowed them to reduce the need for debt accumulation, especially in the case of Kuwait, and a low fiscal break-even point for the price of oil in the budget, which has limited the size of the budget deficit despite the significant decline in oil revenues, as in the case of Abu Dhabi, or its ability to mitigate the shock of oil revenues by significantly reducing major expenditures or imposing new important measures for non-oil revenues, as is the case for Saudi Arabia.
According to Moody’s data, Kuwait and Abu Dhabi have the largest oil sectors compared to the rest of their economies, as the total value added of the oil and gas sector in Kuwait exceeds 41% of the country’s GDP in 2021, while the agency noted that Kuwait has the highest financial strength among the Gulf countries thanks to the low proportion of debt. Moody’s believes that upward pressures on credit in Gulf countries with high ratings – other than Qatar – will be limited to modest improvements in economic strength, but credit factors will remain constant and constrained higher in due to the high exposure of sovereigns to the risks of the transition to green energy in the long term, and their ability to mitigate these risks over time.