Sustained drop in oil price may slow Gulf Arab economies — S&P

DUBAI — A prolonged decline in oil prices will likely slow the economies of the energy-rich Gulf Arab states and impact their massive infrastructure projects, according to Standard and Poor's Ratings Services (S&P).

"The recent drop in hydrocarbon prices, if sustained, could have a significant impact on the region's economic and financial indicators... and dampen economic growth," S&P said in a report.

On average, energy revenues for the six Gulf Cooperation Council (GCC) states constitute 46 per cent of their gross domestic product (GDP) and three quarters of their exports, the report indicated.

Total GDP of the GCC states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — hit $1.64 trillion last year, according to the International Monetary Fund (IMF).

S&P viewed Bahrain and Oman as most vulnerable to a decline in the hydrocarbon market, and Qatar and UAE as the least vulnerable.

"While the Gulf countries' significant oil and gas reserves are key supports for their sovereign credit ratings, their economies' concentration in the hydrocarbon sector is also a significant vulnerability," it said.

It added that the decline will hurt infrastructure projects and the private sector.

The agency revised Brent oil price at $85 a barrel for the rest of the year and $90 a barrel for 2015 and beyond. The assumption is very close to most of the GCC's budget price for oil.

Lower government revenues may also result in more efforts to tackle energy subsidy reform, but this is likely to hurt industries reliant on feedstock subsidies, such as petrochemicals.

A top World Bank official said last week that the GCC states, which pump a fifth of the world's crude oil, spend more than $160 billion on energy subsidies annually, and called for immediate cuts.

IMF chief Christine Lagarde warned last month that GCC states will face budget shortfalls if the recent decline in oil prices persists.

Oil prices have lost about 30 per cent since it started to decline in June.

The total revenue of the GCC states — 90 per cent of which come from oil — more than doubled from $317 billion in 2008 to $756 billion in 2012.

It declined slightly to $729 billion last year, according to IMF estimates.

IMF has said that GCC states will not be greatly affected in the short-term as they can tap into their massive fiscal reserves estimated at $2.45 trillion.

Separately, Oil-rich Kuwait on Monday ordered Cabinet ministers to "rationalise spending" after considering measures to counter the sharp decline in oil prices.

"The government asked ministers to control expenditure and rationalise spending in such a way to serve citizens and achieve the country's higher interests," said an official statement following the weekly Cabinet meeting.

The statement added that the Cabinet had studied proposals presented by the finance ministry about the slide in oil prices and "emphasised it will continue with capital spending and projects under the development plan".

Oil income makes up around 94 per cent of public revenues in the emirate which pumps around 3 million barrels per day.

The head of parliament's budget committee, lawmaker Adnan Abdul Samad, has said if oil prices continue at the current level, the budget surplus would shrink to just $3.1 billion from $45 billion last year.

The emirate has decided to end subsidies on diesel, kerosene and aviation fuel as a first step in revising heavily-subsidised electricity, water and petrol.  

Local media said Kuwait's fiscal reserves grew to $548 billion as of June 30. 

The tiny emirate has a native population of 1.25 million and is also home to about 2.8 million foreigners.