The latest report from credit rating agency Moody’s found that despite ambitions to diversify the Gulf’s fossil fuel economies, results have been “limited” and efforts will be limited by falling oil prices. .
The clock is ticking for the Gulf economies to end their over-reliance on fossil fuels as more countries around the world invest resources to accelerate their transitions to green energy and a low-carbon future.
But a report released Monday by credit rating agency Moody’s found that while Gulf Cooperation Council (GCC) states were announcing ambitious plans to suffer their dirty habits, economic diversification efforts have only paid off. ” limited “and further advances could slow down oil prices and too many plans targeting the same non-oil sectors.
“While we expect the momentum of diversification to increase, it will be dampened by the reduced availability of resources to finance diversification projects in a lower oil price environment and by intra-GCC competition in a relatively narrow target sectors, ”Moody’s said.
The credit rating agency also said plans to expand hydrocarbon capacity in the region, combined with “government commitments with zero or very low taxes,” do not bode well for the Gulf to significantly reduce its heavy dependence on revenue. fossil fuels.
The link between taxes and over-dependence
Despite the variations between the GCC countries, the group stands out worldwide for its excessive dependence on hydrocarbons when it comes to generating revenue and filling state coffers.
Oil and gas production accounted for up to 45 percent of Kuwait’s economic production in 2019, about 35 percent of that of Qatar and Oman, and nearly a quarter of that of Saudi Arabia and the United Arab Emirates, the report notes. Bahrain was the only GCC country where hydrocarbons accounted for less than 15 percent of the pre-pandemic gross domestic product (GDP).
Hydrocarbons also generated most of government revenue, with Bahrain and the United Arab Emirates deriving more than 50 percent of public oil and gas revenues, and Kuwait, Qatar and Oman show the highest level of dependence.
“This is partly a consequence of the long-standing commitment of the GCC governments to a zero or very low fiscal environment, which is part of the implicit social contract between the rulers and the citizens, but also reflects the desire to encourage the growth of the sector. not oil and development, ”Moody’s said.
As the report notes, the key difference between GCC states and other countries that depend heavily on oil and gas “is an effective absence of direct taxes,” including personal income taxes and taxes. on the property.
Only Oman has addressed the spectrum of a personal income tax, saying it was studying the introduction of one, but that it would only apply to wealthier people. The de facto ruler of Saudi Arabia, Mohammed bin Salman, stated in a recent interview that there would be no personal income taxes introduced into the kingdom.
However, four GCC states have implemented value-added taxes or VAT, with Oman being the last to introduce the tax in April.
One of the biggest diversification efforts the Gulf could face is plans to further expand oil and gas production, which Moody’s accredits its desire to develop later industries such as petrochemicals and plastics.
The report also notes that these plans may reflect the anticipation that as the sun sets on fossil fuels, countries facing higher production costs and heavier barriers relative to GCC states will leave a larger portion of the remaining hydrocarbon pie in the Gulf.
Given plans for oil and gas expansion and a lack of political will to collect more taxes, Moody’s predicts that if oil prices average about $ 55 a barrel, oil production should “continue. being the main contributor to the GDP of the GCC sovereigns, the main source of government revenue. ” and, therefore, the key engine of the fiscal force for at least the next decade ”.