DUBAI: GCC countries are currently benefiting from sizable hydrocarbon resources, but the large dependence on hydrocarbon revenues remains a key credit risk, S&P report reveals.
According to a report published by S&P Global Ratings, the Gulf economies’ high concentration and dependence on the hydrocarbon sector, which averaged about 30% of GDP and 60% of total exports over 2015-2016–even considering subdued oil prices–could become a credit negative factor when not offset by substantial financial
buffers.
Despite the implementation of national development plans across the region, structural impediments in GCC economies will continue to restrict any attempts to diversify the economy away from hydrocarbons.
The report titled “Gulf Sovereigns Will Find It Hard to Diversify Away from Hydrocarbons,” says that despite supporting the economy when hydrocarbon prices are high, a narrowly-based economy tends to be more vulnerable to key sector business cycle swings, amplifying the volatility of its growth, general government revenues, and current account receipts.
The large hydrocarbon endowment and the high income it generates has resulted in past general government surpluses, low government financing needs, and net external asset positions for most Gulf Cooperation Council (GCC) countries. S&P Global Ratings incorporates these key strengths in its sovereign credit ratings on these countries.
The report considers the various impediments to diversification away from hydrocarbons, including the foreign exchange regime, climate, education and skills, openness to doing business, attractive public-sector employment, and similarities of diversification plans.
The report concludes that GCC governments’ diversification efforts remain aspirational, with significant progress to be made if they are to be achieved.
