JAKARTA (TheInsiderStories) – The coronavirus outbreak and the related oil price shock will lower sovereigns’ economic and fiscal strength, increase weaker sovereigns’ vulnerability to shifts in sentiment and expose weaknesses in domestic and international institutions, Moody’s Investors Service said in a report.
As with other sectors, the agency will adjust ratings to reflect changes in credit risks profiles that the rating agency considers to be unlikely to fully recover within the next few years, and those with higher default risk.
Moody’s currently assumes that the crisis, however severe, will be relatively short-lived and that growth will resume in the second half of the year. In that scenario, given their particular credit strengths, the rating implications of the crisis for global sovereigns are likely to be relatively limited.
“Sovereigns can weather storms others cannot. Generally speaking, they have deep pockets, wide sources of revenues and funding, often including supportive banking systems, and the unique ability to determine which expenditure obligations they meet without sanction,” said Sarah Carlson, a Moody’s SVP in her latest report.
For now at least, material credit and rating consequences are expected to be focused on weaker sovereigns or on those facing idiosyncratic challenges, probably relating to weak institutions or ineffective policymaking.
“Our assumptions about the impact of the crisis are dynamic and could change. If damage to growth were to be more severe and protracted, with debt rising rapidly and access to affordable financing reduced, the credit implications for sovereigns would be more profound,” she added.
Earlier, the agency said, oil prices will remain volatile in the coming year, while key issues will include producers’ response to growing inventories, the pace of recovery in volumes out of Saudi Arabia, a possible acceleration of United States (US) production and slowing growth in global demand due to generally weaker economic growth.
“The stable outlook for the integrated oil and gas sector is driven by an expected recovery in EBITDA on the back of upstream production growth and higher refining margins,” says Steve Wood, managing director of Moody’s.
The stable outlook for the exploration and production sector is based on low single-digit EBITDA growth in 2020, despite lower capital spending. Volume growth will ease to 5 – 7 percent, while efficiency gains will partially offset weak volumes and prices.
A focus on capital discipline and free cash flow will remain pivotal, and consolidation in the sector will continue. The stable outlook for the oilfield services and drilling sector in the coming year reflects flat EBITDA growth and only modest revenue growth with no significant improvement in margins.
Although upstream capital spending is leveling off, production is likely to grow in the coming year. Meanwhile, the US federal regulatory climate remains supportive, though state and local regulation will continue to pose hurdles.
Moody’s positive outlook for the refining and marketing sector reflects robust EBITDA growth of above 10 percent in this year. Global demand for distillates remains strong and inventories are low.
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