Fiscal breakeven oil prices seen as key differentiator in GCC outlook

Gulf sovereigns are gearing up to tackle fiscal challenges as breakeven oil prices return to the forefront, demonstrating the region's capacity to adjust to evolving global circumstances, according to an S&P Global Ratings executive. Benjamin Young, managing director of Emerging EMEA Sovereign Ratings at S&P Global Ratings, stated this on the latest Middle East Credit Gateway podcast.

Young said that fiscal breakeven prices are expected to become "key credit differentiators" over the next year as oil price forecasts decrease. "We anticipate downward pressure on prices once strategic reserves are replenished and the market stabilises," Young explained, adding that nations with lower breakevens like the UAE and Qatar are better equipped to handle this shift.

Young highlighted that governments' capacity to modify spending, especially major capital projects, will be a crucial gauge of resilience. "Whether a government may decide to delay, postpone, or optimise a project is also a significant factor in determining how vulnerable credits might emerge in a lower oil price scenario," Young mentioned.

Despite fluctuations in oil markets and geopolitical tensions, Young stressed that Gulf sovereigns have established buffers to withstand shocks. He pointed out that Kuwait, Qatar, Saudi Arabia, and the UAE possess "substantial fiscal assets" that allow them to absorb significant revenue drops without substantially compromising government balance sheets.

However, growth prospects remain uneven, with Young forecasting that average GCC growth in 2026 will decline by 2.5%, before picking up slightly above 5% of GDP the following year. The rebound is attributed to increased hydrocarbon production, ongoing diversification initiatives, and substantial domestic infrastructure investments, Young explained.

Young also noted that diversification efforts are transforming fiscal profiles. He pointed out that non-oil fiscal revenue across the GCC has doubled over the past decade to an estimated $260bn, or 36% of GDP, mainly driven by Saudi Arabia. "A broader array of revenue streams typically makes both economies' fiscal and external revenues less volatile," Young said, stressing that new taxes and levies have bolstered resilience.

Young cautioned that unresolved geopolitical tensions and deliberations surrounding the US-Iran Memorandum of Understanding could disrupt recovery and diminish longer-term growth potential. Nevertheless, Young also stressed that Gulf sovereigns' fiscal strength and adaptability will remain crucial to investor confidence.