Higher oil no quick fix for hydrocarbon-exporting sovereigns' balance sheets
LONDON
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Higher oil and gas prices generally improve the government budget and current account positions
of hydrocarbon-exporting sovereigns, according to top ratings agency S&P Global.
"However, we also view the prolonged and, in some cases, ongoing structural deterioration in their stock positions - government net debt and net external debt - alongside modest fiscal and economic reform momentum as key rating considerations," stated S&P in its report 'S&P Global Ratings Revises Oil And Natural Gas Price Assumptions For 2022-2024.'
"Our sovereign ratings globally incorporate a common base case for key commodities such as oil
and natural gas. We recently raised our assumptions for the average brent oil price to $75 for the
remainder of 2022, $65 in 2023, and $55 in 2024 and beyond," it added.
According to S&P, oil prices are one of many important inputs to its sovereign ratings analysis. "An increase or decline in oil prices positively or negatively affects hydrocarbon exporters, including through their fiscal revenues, balance of payments, and GDP," it stated.
Many hydrocarbon exporters have experienced a deterioration in their fiscal and external balance sheets as low oil prices resulted in sustained and sizable fiscal and external borrowing needs.
These have been met either by debt accumulation or asset drawdowns, it said.
"We differentiate between structural and cyclical changes in oil prices. We have lowered most of
our ratings on sovereign hydrocarbon exporters since the structural change in the oil market that
began in the second half of 2014. We expect relatively modest oil prices over the longer term. As
our ratings already factor in such structural changes, we do not expect cyclical price changes to
significantly affect them," it added.
S&P clarified that this was not to suggest that oil prices have been its only ratings consideration for
hydrocarbon-exporting sovereigns since end-2014.
"For example, in case of Qatar, oil prices are an important input to the sovereign ratings because its gas export contracts are largely priced off oil. However, the increase in the country's external vulnerabilities following the boycott by a group of largely Middle Eastern governments was a main factor in our 2017 downgrade of Qatar," it stated.
For sovereigns generally, important rating factors since 2020 have been country-specific impacts of the pandemic and its implications for global economic supply-and-demand dynamics, it added.
The top ratings agency pointed out that the policy response of hydrocarbon-exporting sovereigns was at least as important as shifts in production or commodity prices.
"When higher oil prices result in higher revenues, governments may choose to allow their fiscal balances to improve or they may decide to increase spending to support their economies. Governments may use the reduced pressure on public finances to delay planned expenditure cuts or the implementation of measures to diversify their revenue streams," it stated.
"We assess the effects of oil price changes alongside these and many other factors such as GDP,
inflation, and the sovereign's external position," it added.
S&P pointed out that even if oil prices increase further, it would not necessarily expect the sovereign ratings on hydrocarbon-exporting sovereigns to return to pre-2015 levels, absent changes in other rating factors.
Many hydrocarbon exporters have experienced a deterioration in their fiscal and external balance sheets as low oil prices resulted in sustained and sizable fiscal and external borrowing needs.
These have been met either by debt accumulation or asset drawdowns. Even if the fiscal
and external deficits of hydrocarbon exporters improve in the near term on the back of higher oil
prices, it would likely take longer for their net asset positions to strengthen to pre-2015 levels.-TradeArabia News Service
