In an extraordinary move, the rating agency Moody’s unexpectedly undertook tough action against multiple Gulf countries. In total, all member states experienced some sort of deterioration of the standings, either in terms of downgrades of assigned ratings or on outlook.
Bahrain, Kuwait, Qatar and the UAE suffer from a negative outlook. Saudi Arabia and Oman have been assigned a stable outlook. Three — Saudi Arabia, Oman and Bahrain — suffered a downgrade in their ratings.
Much to their credit, Saudi Arabia and Oman saw their outlook reversed from negative to stable. Not convincingly, the agency has reversed the outlook for the UAE, Qatar and Kuwait from stable to negative.
This marks one of the rare occasions when the rating agency, generally known for being tough and offering unsolicited ratings, assumes collective steps regarding the Gulf countries. Undoubtedly, the culprit remains the low oil prices of nearly two years, with adverse implications for budget and external accounts.
Bahrain has the worst possible rating among its GCC partners. The country’s rating has been downgraded from Ba1 to Ba2 with a negative outlook. A major shortcoming relates to absence of clarity concerning possible financial support from regional countries. Ostensibly, these supportive GCC countries are not prepared to make specific commitments, hence the ambiguity and its reflection on the rating and outlook.
Worryingly, the agency projects a substantial rise in Bahrain’s debt burden in the next few years. The debt level might reach 100 per cent of GDP in 2019, up from 59 per cent in 2015. What’s more, interest payments could consume a notable 27 per cent of budgetary revenues in 2016 versus 16 per cent in 2015.
Certainly, rating agencies including S&P have assumed a common policy towards Bahrain in the recent past, in essence by downgrading — a phenomenon that adds to the cost of financing.
Moody’s has opted for reversing the outlook for Oman to stable on the grounds of low-levels of governmental indebtedness plus fiscal buffers. The measures entail lowering the amounts set aside for subsidies from $3.4 billion in 2015 to $1.4 billion in 2016. Other steps comprise of doing away with numerous allowances like insurance and travel.
Nevertheless, the sultanate’s rating was downgraded from A3 to Baa1, a major drop reflecting challenges like budgetary shortage.
Saudi Arabia, the largest Arab economy, suffered from a decline in ratings from Aa3 to A1. To be sure, logic for the move is a disputable one, a combination of higher debt and lower economic growth levels. True, the budget for fiscal year 2016 projects a deficit of $87 billion on expenditures of $224 billion.
Still, Saudi authorities succeeded in overcoming outstanding debt several years, during the days of strong oil prices. Economic conditions are bound to improve in the years ahead as the kingdom embarks on major reforms, in turn demonstrated in the 2030 vision. Among others, the vision calls for opening up the country by increasing the number of visitors to the Grand Mosque outside of the Haj season from 8 to 30 million per annum.
Three GCC countries — the UAE, Qatar and Kuwait — have had their ratings reflect strong financial buffers. Led by Abu Dhabi, the UAE enjoys substantial sovereign wealth funds and other external assets besides a dynamic economy. All three economies enjoy the much sought after rating of Aa2.
The introduction of VAT in 2018 should help streamline public finance further.
The writer is a Member of Parliament in Bahrain.
