Lower-for-longer oil price will intensify credit pressures for oil-exporting sovereigns

By Doreenn Leong

Moody’s has revised our oil price assumptions further downwards to account for the deeper and longer-lasting shock to global oil demand as a result of the coronavirus shock, which will be only partially offset by some adjustments to supply. Notwithstanding the increase in prices in recent weeks, we expect oil prices to remain lower for longer which will exacerbate pressures for all oil exporters.

Credit risks are more intense for Oman (Ba2 RUR-), Iraq (Caa1 stable), Angola (B3 RUR-), and the Republic of Congo (ROC, Caa2 stable) because of limited fiscal space and heightened liquidity pressures, which is reflected in our ratings and ratings reviews. By contrast, sovereigns with greater policy flexibility and larger fiscal and foreign currency buffers are in a better position to weather a longer period of lower oil prices.

“We now expect a materially larger shock to fiscal and external balances. Iraq and Oman will see both their fiscal and current-account deficits widen by a further 5 percentage points (pps) of GDP this year and next, absent additional policy measures, compared to our estimates in April.

“On the external side, pressure is even greater for the ROC, which without adjustment will see a further 7-10 pps of GDP widening in current account deficits. Among higher rated sovereigns, we expect credit pressures to be most significant in Kuwait (Aa2 RUR-) and Saudi Arabia (A1 negative). By contrast, relatively greater levels of economic diversification buffer the impact on Russia (Baa3 stable). Our ratings and outlooks capture the immediate implications of these sovereigns’ relative exposure to another step in the oil price shock,” it says.

However, the ability to absorb the shock will depend on policy-adjustment capacity and the size of buffers. Sovereigns with a demonstrated track record of being able to reduce spending are in a better position to manage the shock. Currency flexibility (Russia, Kazakhstan (Baa3 positive)) or the presence of large sovereign assets (Azerbaijan (Ba2 stable), Kazakhstan, Qatar (Aa3 stable), and the United Arab Emirates (UAE, Aa2 stable) and foreign-currency reserves will also provide a buffer. By contrast, sovereigns whose capacity to adjust to a deep and potentially durable shock is limited – such as Oman, Iraq, and the ROC – and those with already heightened liquidity pressures and very limited buffers – such as Bahrain (B2 stable) – are most at risk.

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