Dubai: The credit strength of a number of Gulf Cooperation Council (GCC) countries is expected to weaken further this year driven by weak growth outlook and geopolitical tensions, according to leading credit rating agencies, Standard & Poor’s and Moody’s Investors Service.
The 2018 outlook for sovereign ratings in the GCC is negative, reflecting GCC members’ muted economic growth, structural challenges and geopolitical tensions in the region, according to Moody’s.
“Although oil prices have risen significantly from their lows in early 2016, most sovereigns in the region will continue to run sizeable fiscal deficits and record an increase in their debt burdens over the next 12 to 18 months. In addition, long-standing geopolitical event risks have come to the fore again and will play an important role in defining sovereign credit quality in 2018,” said Steffen Dyck, Senior Credit Officer at Moody’s.
Three of the six GCC sovereigns hold negative rating outlooks, while the remaining three have stable outlooks, pointing to the likelihood of fewer downward rating adjustments in 2018 compared to 2017.
According to S&P, since the fall in oil prices began, the creditworthiness of some of the hydrocarbon exporters has significantly deteriorated which was reflected in their sovereign ratings.
“We have downgraded Oman by six notches, Bahrain by five, Saudi Arabia by three, Sharjah by two, and Qatar by one since then, though these downgrades were not all a direct result of lower oil prices. Now the net hydrocarbon exporters’ average rating is closer to BBB+, while the hydrocarbon importers’ average rating remains around ‘BB+’,” said Trevor Cullinan, a credit analyst with S&P.
S&P retained the ratings for Abu Dhabi and Kuwait at AA in its latest ratings update. Large stocks of external assets, as a percentage of gross domestic product (GDP), provided the economies of these two sovereigns with a significant buffer following the sharp fall in oil prices in mid-2014.
Among the oil exporters, S&P lowered the ratings on Oman to BB from BB+ due to deterioration in its external balance sheet. Analysts expect that its external debt will exceed its liquid external assets for the first time next year, and that the gap will widen until 2020. The rating agency also lowered the ratings on Bahrain by one notch to B+from BB-.
“This reflects our view that the low levels and heightened volatility of international reserves at the central bank expose Bahrain to risk should the country experience a sharp deterioration in its access to external liquidity,” Cullinan said.
Moody’s expects the regional GDP growth to pick up this year from a flattish growth last year but the aggregate growth will remain well below the average 5 per cent per year seen between 2010 and 2015, given flat oil and gas production and a slow recovery in non-oil growth.
While rising oil prices and fiscal consolidation measures have helped to narrow GCC fiscal deficits from their peaks in 2015 and 2016, the region as a whole will continue to record lower revenues than spending.
GCC government debt burdens will continue to rise, but at varying speeds.
Bahrain’s government debt is expected to approach 100 per cent of GDP by 2019, while further increases in the debt burdens of Kuwait and Saudi Arabia will be at much lower levels. Meanwhile, Qatar and, at a much lower level, the UAE, will see their debt loads stabilise in 2018 and 2019.
In addition to economic conditions geopolitical tensions the region are also expected to impact the credit ratings. Moody’s expects the diplomatic and economic boycott of Qatar by Saudi Arabia, the UAE and Bahrain to extend well into 2018 and possibly beyond. Moody’s also sees a risk that the long-standing regional rivalry between Saudi Arabia and Iran could escalate further, including through the worsening proxy conflict in Yemen.
“This rise in regional geopolitical tensions is credit negative for the region as a whole given the potential impact on investor confidence and therefore also growth and on external financing costs,” Cullinan said.
