Higher oil and gas prices generally help to improve the government budgets and current account positions of hydrocarbon-exporting sovereigns. However, the recent rise in oil prices may not have any major impact on their sovereign credit ratings.
We expect oil prices to moderate over the longer term, with the Brent oil price averaging $60 per barrel for the remainder of 2021, $60 in 2022, and $55 in 2023 and beyond, as per our report “S&P Global Ratings Revises Oil And AECO Natural Gas Price Assumptions And Introduces Dutch Title Transfer Facility Assumption”.
Moreover, oil prices are one of many important inputs of our sovereign ratings analysis for hydrocarbon exporting countries. The prolonged and, in many cases, ongoing structural deterioration in stock positions–government net debt and net external debt–alongside relatively limited fiscal and economic reform momentum, remain fundamental considerations for the hydrocarbon-exporting sovereigns we rate.
It should be noted that we differentiate between structural and cyclical changes in oil prices. We lowered the ratings on most of the sovereign hydrocarbon exporters since the structural change in the oil market beginning in the second half of 2014. We expect relatively modest oil prices over the longer term. Since our ratings already factor in our view of such structural changes, we do not expect cyclical price changes to significantly affect our ratings.
Even if oil prices return to much higher levels, we would not necessarily expect the sovereign ratings on hydrocarbon-exporting sovereigns to return to their pre-2015 levels, absent changes in other rating factors. Many hydrocarbon exporters have experienced a deterioration in their fiscal and external balance sheets as lower 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 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 stock positions to be strengthened back to pre-2015 levels.
This is not to suggest that oil prices were our only consideration in revising the ratings of hydrocarbon-exporting sovereigns since end-2014. For Qatar, for example, oil prices are an important input to the sovereign ratings as its gas exports are largely priced off oil.
However, the increase in Qatar’s external vulnerabilities due to the imposition of a boycott by a group of largely Middle Eastern governments was a main factor in the 2017 downgrade. For sovereigns generally, important rating factors since 2020 have also been the COVID-19 pandemic’s specific country impact and implications for world economic growth.
The policy response of hydrocarbon exporting sovereigns is of equal if not more importance than 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 to increase spending to support their economies. As has previously been the case in certain countries, governments may use the reduced pressure on public finances to delay expenditure consolidation measures or diversifying their revenue streams. We assess the impact of oil price developments alongside these and many other factors.
