Higher Gulf ratings unlikely - Moody's

Dubai: Despite their stellar economic performance and swelling surpluses, the Gulf states' sovereign ratings have limited upward scope in the medium term due to geopolitical risks and the high reliance of these economies on the hydrocarbon industry.

"Since 2003, we have upgraded all six GCC member states' foreign currency government bond ratings by between two and four notches. These ratings now range from A2 for Bahrain and Oman, to A1 for Saudi Arabia, and Aa2 for Kuwait, Qatar, and the UAE. These are high investment grade ratings and denote a very low risk of default," said Tristan Cooper, vice-president of Moody's Sovereign Risk Unit in Dubai.

According to Moody's, GCC governments now have sizeable net asset positions (gross assets minus gross debt), ranging from around 40 per cent of GDP in Bahrain to levels exceeding 150 per cent in Kuwait and the UAE. This compares favourably with net government debt positions for the majority of Aaa rated countries.

Although the spillover effects of past regional crises on the credit-worthiness of GCC states have been surprisingly limited, Moody's said the relative political instability of the surrounding region is a limiting factor in ratings. In addition, high concentration of Gulf GDPs on oil revenue is also a major constraint. The portion of nominal GDP generated from oil and gas ranges from a low of 25 per cent in Bahrain to more than 60 per cent in Qatar.

Moody's also points to the developing nature of institutions as another cause for lower ratings for the GCC when compared with Aaa-rated countries. "Such factors are important for determining sovereign ratings because they are an indication of the likely stability and consistency of the domestic policy environment. Countries with weak institutions are more likely to have erratic economic policies," Cooper said.

Despite the constraints, Moody's said the GCC's current ratings denote a high level of sovereign creditworthiness based on each country's financial strength and ability to cope with potential shocks.