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Oil price rise could lead to improved financial positions of Gulf countries

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Creditworthiness will depend on sudden oil gains

KUWAIT CITY, Sept 15: The credit rating agency “Moody’s” reported that the rise in oil prices during the next two years will lead to a significant improvement in the financial and external positions of the Gulf countries, reports Al- Rai daily. However, the agency made it clear that the substantial improvements that will occur in the creditworthiness will depend on the size of the sudden oil gains that these countries will reap, and their use to address the structural credit pressures caused by their exposure to the cyclical fluctuations of global oil demand and prices, and because of the risks of transitioning to green energy in the long run.

The agency added that the recovery of global oil demand and prices from the recession allowed major oil and gas producers, including the Gulf states, to increase their production, offsetting most of the production cuts 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 percent. During the same period, the UAE and Kuwait increased their crude oil production by nearly 15 percent, 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 their production in the past several years, and have not significantly enhanced their production.

Their major oil and gas production will be in 2022. On the other hand, Moody’s stated that governments whose economies and financials are more sensitive to oil price fluctuations due to their heavy dependence on the hydrocarbon sector are the ones that will benefit more than others from the current high oil prices in terms of the significant improvement in debt burden and sustainability measures. This supports the agency’s assessment of the financial strength of these countries.

However, for many Gulf countries, notably Kuwait, Abu Dhabi and Saudi Arabia, their financial strength is already very high due to relatively low debt burdens and the availability of large financial reserves in the form of assets held by sovereign wealth funds, which will limit the scope of significant upward pressure on creditworthiness only Because of the high level of financial performance.

These governments have also witnessed the least deterioration in their financial strength since 2015, as despite some material erosion in the balance sheet during the period 2015- 2020, Kuwait, Abu Dhabi and Saudi Arabia were able to avoid a significant rise in their debt, mainly due to the strength of their financial reserves that allowed them to reduce The need for the accumulation of debts, especially in the case of Kuwait, and for a low fiscal breakeven point for the price of oil in the budget, which limited the size of the fiscal deficit despite the noticeable decline in oil revenues, as in the case of Abu Dhabi, or its ability to mitigate the shock of oil revenues by significantly reducing spending significant or by imposing important new 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 as in 2021, while the agency noted that Kuwait has the strongest financial strength among Gulf countries thanks to the low proportion of debt. Moody’s believes that the upward credit pressures in the Gulf countries with high ratings – other than Qatar – will be limited to modest improvements in economic strength, but the credit factors will remain constant and constrained in an upward manner due to the high exposure of sovereigns to the risks of transition towards green energy in the long term, and their ability to to mitigate these risks over time.

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