The hottest report from credit rating scores agency Moody’s uncovered that irrespective of ambitions to diversify Gulf economies absent from fossil fuels, the outcomes have been ‘limited’ and efforts will be constrained by reduced oil charges.
The clock is ticking for Gulf economies to finish their overreliance on fossil fuels, as far more nations all over the planet pour means into accelerating their transitions to environmentally friendly vitality and a reduced carbon potential.
But a report unveiled on Monday from credit rating rankings company Moody’s observed that in spite of Gulf Cooperation Council (GCC) states asserting ambitious ideas to kick their crude habits, economic diversification endeavours have yielded only “limited” outcomes, and further more development could be held back by reduced oil selling prices and as well lots of blueprints focusing on the exact same non-oil sectors.
“While we assume the diversification momentum to decide up, it will be dampened by decreased availability of assets to fund diversification projects in a reduce oil value ecosystem and by intra-GCC competition in a somewhat narrow array of specific sectors,” claimed Moody’s.
The credit score rankings company also claimed programs to grow hydrocarbon capacity in the region, combined with “government commitments to zero or very reduced taxes”, do not bode nicely for the Gulf to appreciably lessen its major dependency on fossil fuel revenues.
The url involving taxes and overreliance
Even with versions among GCC countries, the group stands out globally for its overreliance on hydrocarbons when it arrives to building earnings and filling point out coffers.
Oil and gas manufacturing accounted for as a great deal as 45 % of Kuwait’s financial output in 2019, about 35 percent of Qatar’s and Oman’s, and virtually a quarter of Saudi Arabia’s and the United Arab Emirates’, the report notes. Bahrain was the only GCC state the place hydrocarbons accounted for fewer than 15 p.c of gross domestic products (GDP) pre-pandemic.
Hydrocarbons also produced the lion’s share of governing administration revenues with Bahrain and the UAE deriving additional than 50 percent of authorities income from oil and fuel, and Kuwait, Qatar and Oman demonstrating the best level of dependency.
“This is partly a consequence of GCC governments’ extended-standing dedication to a zero or very very low tax setting, which is part of the implicit social deal between the rulers and the citizens but also reflects the drive to incentivize non-oil sector advancement and progress,” mentioned Moody’s.
As the report notes, the critical difference between the GCC states and other countries that rely seriously on oil and gas “is an effective absence of direct taxes” together with particular cash flow taxes and house taxes.
Only Oman has broached the spectre of a personalized profits tax, declaring it was researching the introduction of a single, but it would only use to the wealthiest people. Saudi Arabia’s de facto ruler Mohammed bin Salman stated in a the latest job interview that there would be no own income taxes introduced in the kingdom.
Four GCC states have nevertheless executed value-included taxes, or VAT, with Oman currently being the latest to introduce the levy in April.
A single of the biggest headwinds Gulf diversification efforts could facial area are designs to more expand oil and gas manufacturing, which Moody’s credits to a need to establish downstream industries like petrochemical and plastics.
The report also notes these programs could replicate anticipation that as the sunshine sets on fossil fuels, international locations that facial area bigger creation expenses and additional onerous regulatory hurdles relative to the GCC states will depart a larger slice of the remaining hydrocarbon pie to the Gulf.
Given oil and gasoline growth strategies and the lack of political will to levy more taxes, Moody’s predicts that if oil price ranges regular about $55 a barrel, hydrocarbon generation ought to “remain the one biggest contributor to GCC sovereigns’ GDP, the key supply of government earnings and, for that reason, the essential driver of fiscal energy over at minimum the next decade”.