LONDON, Feb 16 (Reuters) – A sustained drop in oil prices to $40 a barrel as the world weans itself of fossil fuels would cut Gulf exporters’ sovereign ratings by two notches over time, leaving the average credit score just above ‘junk’, S&P Global said on Sunday.
A report by the agency said a “hypothetical long-run stress test” where oil prices fell to below $40 by 2040 suggested the average rating of Gulf sovereigns could fall by two notches from ‘BBB+’ to ‘BBB-‘.
Hydrocarbons contribute, on average, 81% of central government revenues for Gulf sovereigns – the countries of the Gulf Cooperation Council plus Iraq – and the pace of economic diversification is expected to remain gradual.
Brent crude prices fell to almost $53 last week but have be averaging just over $60 since tumbling down from over $115 a barrel in 2014.
Under S&P’s $40-a-barrel scenario, every exporter country would see a least one rating cut, the report said.
By 2027, the paper estimated a deterioration in countries’ fiscal positions would push the average rating of Gulf sovereigns down to ‘BBB’ from ‘BBB+’.
As it got closer to 2040 they would fall again, dropping the average down to ‘BBB-‘, the last rung of the coveted investment grade bracket that tends to improve a country’s borrowing costs.
Below that level ratings move into ‘junk’ or ‘non-investment grade’ territory which some large pension funds and asset managers are not permitted to invest in by the mandates.
S&P said that second phase of downgrades would be due to weaker macroeconomic fundamentals and declining GDP per capita levels.
“As the price of oil continues to decline, the concentrated economies of the Gulf shrink commensurately, highlighting the inherent risks of commodity dependence,” the report said. (Reporting by Marc Jones; Editing by Andrew Heavens)
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