Lower oil prices triggered by the pandemic have seen significant drawdowns from the GCC sovereign wealth funds resulting in erosion in these buffers, according to rating agency Moody’s.
The impact of the coronavirus pandemic on oil demand and prices has significantly increased gross funding requirements for sovereigns across the GCC, which is being partly funded by drawing down sovereign wealth fund (SWF) assets.
“We expect oil prices to remain below their pre-coronavirus path, due to long-lasting reductions in oil demand in sectors like aviation. Markedly lower hydrocarbon revenues will translate into persistently higher budget deficits – despite some adjustments to expenditure and non-oil revenue measures – leading to higher financing requirements,” said Thaddeus Best, Analyst Sovereign Risk Group at Moody’s.
UAE, Qatar in strong position
According to Moody’s, the stock of SWF assets in Qatar and Abu Dhabi (UAE) remains more than ample to cover decades of fiscal deficits at current levels. However, for Oman and Saudi Arabia, which possess a more modest stock of SWF assets, significant drawdowns will lead to substantial erosion of their SWF buffers over the medium term, reducing the uplift to fiscal strength derived from these assets, and increasing external vulnerability risks in Oman.
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