Hydrocarbon-exporting sovereigns return to pre-2015 levels unlikely

Higher oil and gas prices generally improve the government budget and current account positions of hydrocarbon-exporting sovereigns. 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.

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. Indeed, oil prices are one of many important inputs to our 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.

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.

This is 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.

The policy response of hydrocarbon-exporting sovereigns is 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. We assess the effects of oil price changes alongside these and many other factors such as GDP, inflation, and the sovereign's external position. 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 ratings factors other than oil prices. 

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.