Sovereigns with a demonstrated track record of being able to reduce spending are in a better position to manage the shock, ONA reports citing the research of Moody's Investors Service.
Currency flexibility (Russia, Kazakhstan (Baa3 positive)) or the presence of large sovereign assets (Azerbaijan (Ba2 stable), Kazakhstan, Qatar (Aa3 stable), and the United Arab Emirates (UAE, Aa2 stable)) and foreign-currency reserves will also provide a buffer.
By contrast, sovereigns whose capacity to adjust to a deep and potentially durable shock is limited – such as Oman, Iraq, and the ROC – and those with already heightened liquidity pressures and very limited buffers – such as Bahrain (B2 stable) – are most at risk.
During previous periods of higher oil prices, many hydrocarbon-producing sovereigns accumulated significant sovereign assets, which will provide a degree of resilience in an environment of lower prices for longer. This is especially the case where the liquid portion of these assets significantly exceeds government debt and is potentially available to finance fiscal deficits and debt repayments. For example, in 2019 fiscal reserves significantly exceed government debt in the UAE, Qatar, Azerbaijan and Kazakhstan, while they cover nearly 100% of government debt in Saudi Arabia, and more than 50% in Russia.