Moody's: Currency risks rising in Oman and Bahrain
While Gulf Cooperation Council (GCC) countries are well-positioned on average to withstand external payment pressures, Bahrain and Oman are more exposed due to their low levels of foreign exchange reserves and large current account deficits.
These findings are expanded upon in Moody's Investors Service’s report, Sovereigns–Gulf Cooperation Council: Currency Risks Still Low on Average, But Rising in Oman and Bahrain.
"GCC countries have seen a substantial weakening in their current account balances as a result of the fall in oil prices since 2014," said Mathias Angonin, a Moody's Analyst and co-author of the report. A current account surplus of close to 18 per cent of GDP on average across GCC countries over 2005-2014 has shifted to a deficit of -3.4 per cent in 2016, up from -0.6 per cent in 2015.
In 2016, Oman had the highest current account deficit among GCC countries, which Moody's estimates at 20.1 per cent of GDP, and the highest external breakeven oil price at $78.4 per barrel, according to the International Monetary Fund (IMF). Bahrain and Saudi Arabia registered moderate current account deficits of around 3.3-3.4 per cent of GDP, while Qatar's was much smaller at -0.5 per cent, according to Moody's estimates.
"As well as this switch to a current account deficit, higher external debt issuances and a drawdown on foreign exchange and sovereign wealth fund reserves, have led to a material weakening in external positions on average," Angonin added.
Moody's expects the aggregate current account deficit to narrow to $5.5 billion (0.3 per cent of GDP) by 2018 from $21 billion (3.4 per cent of GDP) in 2016. This will, however, still be well below the large surpluses recorded between 2005 and 2014.
Kuwait and the UAE are expected to post average surpluses of 5.6 per cent of GDP and 3.1 per cent respectively in 2017–18. Qatar will return to a small surplus of 0.6 per cent of GDP in 2017-18. For Saudi Arabia and Bahrain, Moody's expects moderate current account deficits of 2.7 per cent of GDP on average in 2017-18. Oman has a much larger external gap, and the current account deficit is expected to average 11.6 per cent of GDP over the same period.
If external pressures were to increase or external funding dried up, Moody's would anticipate stronger GCC countries to provide deposits, loans or grants to weaker countries. Moreover, GCC countries have already pledged $20 billion to Bahrain and Oman in 2011 through a new GCC Fund. Although transfers do not pass through the Bahraini and Omani government budgets, they support their external payments positions.
GCC authorities are unlikely to abandon US dollar pegs as they have bolstered macroeconomic stability and private sector confidence, lowered transaction costs, and helped to avoid the currency volatility experienced by most emerging economies.