Dubai: The credit ratings of all GCC countries have come under pressure following the sharp decline oil prices over the past two years, which resulted in a squeeze on government finances.
However, analysts say there is a clear divergence in terms of ratings and the outlook among countries depending on their perceived resilience to the oil shock.
Saudi Arabia, the largest economy in the GCC, has been downgraded along with Oman and Bahrain by leading credit rating agencies such as Moody’s, Standard & Poor’s and Fitch since the beginning of this year.
Last week, Moody’s downgraded several entities in the region including the sovereigns of Saudi Arabia (to A3), Oman (to Baa1) and Bahrain (to Ba2). In early February S&P had downgraded short-term foreign- and local-currency sovereign credit ratings on Saudi Arabia to “A-/A-2” from “A+/A-1” with a stable outlook Bahrain to “BB/B” from “BBB-/A-3 and Oman to “BBB-/A-3” from “BBB+/A-2” with a stable outlook.
Analysts say the divergence in ratings and outlook among GCC sovereigns point to the varying levels of the shock absorption capacity and the relative economic strength of these economies.
“The GCC has become a ‘tale of two spheres’ with credit ratings on UAE, Qatar and Kuwait remaining firmly in the Aa category while those on Saudi Arabia, Oman and Bahrain experiencing free fall and noting multi-notch downgrades. That said, investors have already adjusted their expectations to the weakest link level and bond prices no longer gyrate wildly on announcement of rating downgrades,” Anita Yadav Head of Fixed Income Research at Emirates NBD wrote in a note.
With the latest round of downgrade from Moody’s Saudi Arabia, Bahrain and Oman have been subject to one more round of down grade from all leading rating agencies.
The key driver for Oman’s rating downgrade according to Moody’s is that despite the sizeable fiscal consolidation efforts undertaken by the government, a protracted period of low oil prices will negatively affect Oman’s sovereign credit profile beyond the level the rating agency had originally anticipated in February when it downgraded the rating to A3 from A1. From among the oil-exporting sovereigns Moody’s rates, Oman is one of the most vulnerable to an oil price shock. Hydrocarbon exports accounted for an average 67 per cent of total goods exports in 2010 to 2015, while oil and gas revenues constituted 87 per cent of total government revenues over the same period.
Bahrain’s further rating downgrade has come from the assessment that the credit profile of the Bahraini government will continue to weaken materially in the coming years, despite its fiscal consolidation efforts. In particular, the rating agency expects Bahrain’s government debt burden and debt affordability to deteriorate significantly over the coming two to three years. Although Bahrain has benefited from the support of neighbouring countries during times of stress in the past, such support at this juncture lacks clarity, both in its form and timeliness.
The Saudi government is in the midst of an austerity campaign, cutting spending to reduce a $100 billion (Dh367 billion) budget deficit. It has also gone to the bond markets to raise funds from international lenders, successfully borrowing $10 billion in March.
Moreover, in order to address the weakening economy while still maintaining the stability of its currency, the central bank has burnt through over $155 billion in cash reserves since 2014, pushing its reserves below $600 billion as of March. Moody’s expects the cash reserves to continue to decline for the next several years, falling to just $460 billion by 2019. “A combination of lower growth, higher debt and smaller domestic and external buffers leave the kingdom less well positioned to weather future shocks,” Moody’s said last week.
The International Monetary Fund (IMF) in its latest reginal economic outlook said the Fund is encouraged by the reform initiatives across the GCC countries in response to the sharp decline in oil revenues over the past two years.
“We are encouraged by the pace of reforms in the region. A number of countries have announced medium term fiscal reform packages along with economic diversification efforts. There is a clearer road map towards reforms in most of these countries,” said Masood Ahmed, director of the IMF’s Middle East and central Asia department.
Analysts expect until the time oil prices recovered or sustainable measures to balance budgets are implemented regional sovereigns are expected to face further pressure on their credit ratings. But the shortfall in revenues could be managed through a combination of fiscal consolidation measures and market borrowings, instead of exhausting all the government reserves to balance the budgets in the short to medium term.
“I would not recommend using all the cash you have. I would rather recommend [governments] go to the bond market. The investor appetite is huge because we have a search-for-yield environment,” Philipp Good, head of portfolio management at Fisch Asset Management.
Clearly GCC countries have relatively low debt levels which allows them to borrow both domestically and in the global markets. “The region has the highest average ratings globally, but budget deficits need to be addressed through a combination of investment and reform. The funding of these deficits can be achieved at a sovereign level or among government related entities. Privatisation will also play a key role,” Good said.
