Dubai Insulated From Oil Price Slide Due To Economic Diversification – S&P

Dubai will remain insulated from the effects of an oil price slide as it is well diversified, while economic growth across the rest of the GCC could be affected, ratings agency Standard & Poor’s (S&P) said in its recent report.

“Dubai is the exception (in the Gulf) in that it relies more heavily on trade, tourism, real estate and construction, and transportation and is enjoying favorable economic conditions, notwithstanding its federal relationship and political and economic ties with Abu Dhabi – itself an oil-rich sovereign,” the report said.

Among the GCC countries, S&P said that Oman and Bahrain were the most vulnerable to any drop in oil prices while Qatar and the UAE were the least vulnerable.

Brent crude futures have fallen 27 per cent since the start of July and 12 per cent in the last month. In line with that, S&P also revised its brent crude oil price assumption to $85 per barrel for the remainder of 2014 while pegging the oil price at $90 per barrel for 2015 and beyond.

The report found that declining oil prices could dampen economic growth in the GCC countries and weaken operating conditions in the corporate and the infrastructure sectors.

The agency said that a prolonged period of lower government revenue coupled with GCC’s intensive spending plans on developing infrastructure could push up sovereign and government-related entity capital market issuance. This could in turn place a greater onus on the private sector to fund investments, S&P said.

Lower revenues in GCC governments’ coffers might also hamper their efforts to tackle energy subsidy reforms, in turn impacting industries that are reliant on feedstock subsidies such as petrochemicals, the report noted.

On the other hand, the ratings agency also said that any change in the energy subsidies that pave for more cost-reflective tariffs could improve the regulatory environment for infrastructure entities and weigh positively on business risk.

The GCC has traditionally relied on oil wealth with hydrocarbon revenues constituting almost 46 per cent of the nominal GDP and three quarters of total exports for the regional bloc.

“Therefore, the recent drop in hydrocarbon prices, if sustained, could have a significant impact on the region’s economic and financial indicators,” S&P said.

“While the Gulf countries’ significant oil and gas reserves are key supports for their sovereign credit ratings, their economies’ concentration in the hydrocarbon sector is also a significant vulnerability, in our view.”

Although the decline in prices has caused concern among oil producing countries, the majority of them are forecasting a rebound in the latter half of 2015.

OPEC Secretary-General Abdullah al-Badri said last week that the organisation is concerned but not panicking about the drop in prices.

“I think the price will rebound by the second half of next year. But I don’t know by how much. This situation of low prices cannot continue,” he added saying that speculation was playing a role in the price drop.