UAE among least vulnerable to oil price decline: Fitch

Prices lower than the fiscal breakeven oil prices of some global sovereigns exposes the vulnerability of their sovereign credit profiles, according to Fitch Ratings.

Oil prices have fallen sharply, with Brent crude dropping from $115/b in mid-June to close to $80/b.

The global agency says that different fiscal breakeven oil prices of net oil exporters suggests that these sovereigns fall into three categories.

The least vulnerable Fitch-rated sovereigns are Kuwait, Abu Dhabi, and Norway, it said in a new report titled ‘Oil: Fiscal Breakevens a Key Guide to Exporters’ Sovereign Credit Risk’.

“As high per capita producers, they need to devote less of their oil revenues to meeting their populations' needs, giving fiscal breakeven oil prices well below prevailing prices,” The ratings agency said in its report.

“Large buffers have been built in recent years and these sovereigns should continue to record fiscal and external surpluses and strengthen buffers even if oil prices settle at current levels,” it noted.

On the other hand, it stated that lower oil prices will primarily affect sovereign credit fundamentals through their fiscal and external positions.

“They generally pose the greatest risk to the credit profiles of sovereigns with high fiscal breakeven prices and that are already running fiscal deficits, such as Bahrain, Angola, Venezuela, and Ecuador,” the report says.

A third category exists for whom lower oil prices would push fiscal surpluses or close-to-balanced budgets into deficits from 2015, eroding fiscal and external buffers, it noted.

According to Fitch, for these sovereigns, ratings pressures could build in 2015 if prices do not recover but how quickly and to what extent this happens will depend on various factors, including the size of existing buffers (Saudi Arabia has the largest buffers in this category), the broader impact of cheaper oil on commodity-dependent economies (including those with significant buffers, like Russia), and policy responses that may accentuate or contain the impact of falling oil prices.

Policy responses could also contain the direct impact of prices on the most vulnerable sovereigns, although these may have knock-on effects on the sovereign credit profile, it said.

 

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