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Abu Dhabi, UAETuesday 19 June 2018

Gulf nations less reliant on oil but still face obstacles, says S&P

Rating agency cites currency pegs, climate and skilled labour deficits as impediments to greater diversification

Hydrocarbons accounted for about 30 per cent of Gulf countries' GDP and 60 percent of total exports over 2015-2016. Ali Jarekji / Reuters
Hydrocarbons accounted for about 30 per cent of Gulf countries' GDP and 60 percent of total exports over 2015-2016. Ali Jarekji / Reuters

Although they have made strides towards diversifying their economies away from oil, Gulf countries remain dependent on hydrocarbon revenues, making them susceptible to market fluctuations, S&P Global Ratings said.

"Gulf economies' high concentration and dependence on the hydrocarbon sector, which averaged about 30 per cent of GDP and 60 percent of total exports over 2015-16 – even considering subdued oil prices – could become a credit- negative factor when not offset by substantial financial buffers," the agency said. "Despite supporting the economy when hydrocarbon prices are high, we believe 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."

Fixed exchange rates, a harsh climate and a lack of local skilled labour will make it difficult for Gulf nations to diversify their economies away from oil, the agency said in a report, adding its recent lowering of long-term currency ratings on Oman, Bahrain and Saudi Arabia was in part because of concerns about economic diversification and the impact low oil prices have had on regional economies.

"These rating actions also reflected our view that GCC sovereigns have made only marginal progress in diversifying their economies away from hydrocarbons, given the still sizeable contribution of the sector to their economies," said analysts led by Trevor Cullinan at S&P Global Ratings in Dubai.

"While non-oil real GDP has picked up in the region since 2000, the growth rate has gradually decelerated over the last three years in tandem with the decline in oil GDP, further highlighting that diversification efforts are yet to pay off, in our view."

GCC nations have made steps to lessen their reliance on oil in recent years by reducing energy subsidies and mapping out ambitious plans to boost revenues including a value added tax. Still, these plans may take a long time to materialise and there are a number of structural impediments in their way, S&P noted.

Of the serious structural impediments pointed out that the climate of countries in the region, S&P Global Ratings said climate, which averages between 15 degrees Centigrade, was among the biggest constraints preventing the diversification of the economy, especially when it comes to agriculture and manufacturing.

"Development of agriculture, along with other primary sectors, is often the precursor of a shift to manufacturing (secondary sector) and services (tertiary sector)," the report said.

"Given the geographical disadvantages faced by GCC economies, they have not developed in line with this theory."

And when it comes to currencies, the rating agency noted that a pegged currency hampers the ability of GCC countries to be competitive when it comes to non-oil exports.

The UAE was not, however, among the countries to experience a lowering of its long-term currency ratings by S&P last month and has generally been singled out as the one country that has done better than most in the GCC to diversify its economy, especially in the past couple of years and because it has high reserves of cash.

As a result the rating agency earlier this week affirmed the credit ratings of Abu Dhabi, maintaining the Emirate's AA/A-1+ sovereign credit rating while keeping its outlook stable. The agency said that Abu Dhabi would maintain its strong net fiscal asset position above 200 per cent of GDP over 2017 to 2020, one of the highest among government economies that the rating agency reviews.