Business | Opinion
Gulf nations should go for institutional reforms for better rating
Gulf Cooperation Council (GCC) countries should engage in institutional reforms if they wish to attain highest possible credit ratings.
- By Dr Jasim Ali, Special to Gulf News
- Published: 22:52 November 10, 2007
Gulf Cooperation Council (GCC) countries should engage in institutional reforms if they wish to attain highest possible credit ratings. This is the message of a recently released report by Moody's Investors Service entitled Why Are the Wealthiest GCC Countries Not Rated Aaa?
At the moment, Moody's extends Aa2 rating to the UAE, Qatar and Kuwait versus A1 to Saudi Arabia and still A2 to Bahrain and Oman. The ratings are high but not high enough to reflect the region's wealth not least in the light of ever rising oil prices. The petroleum sector contributes more than two-thirds of budgetary income in all GCC countries.
In other words, what explains the fact that not a single GCC state enjoys Aaa rating, which is the highest extended by Moody's? The Aaa rating indicates investment grade and lowest risk. The Special Comment by Moody's helps explain the logic for not assigning the highest possible rating to GCC countries. One such reason relates to geopolitical risk. Unlike some other parts of the world, notably Western Europe, the Middle East lacks a long track record of political stability.
In reality, the Middle East region at large and GCC in particular had more than their fair share of troubles including several wars. At the moment, fear of spillover effects of violence in Iraq represents an ongoing threat.
Yet, the worst may not be over, as the region could experiment another devastating conflict between the US and its allies on the one hand and Iran on the other. The looming catastrophe relates to the Iranian nuclear programme. Trouble in a military confrontation involving the US and Iran stands to undermine current ratings extended to GCC countries, as the conflict could engulf the entire region.
Another reason behind the absence of Aaa ratings concerns the development of institutions in the GCC. The report convincingly argues that GCC states do not have in place effective administrative, legislative and judicial institutions. In fact, the presence of an elected parliament is the exception rather than the rule. Only Kuwait and Bahrain have elected parliaments. For its part, Oman holds elections for a consultative council, with the most recent one held in late October. Still, the Omani council lacks legislative powers regarding defence, security and foreign policy.
Yet, another shortcoming relates to limited availability of economic data in terms of quality and scope, something that hinders effective monitoring. In fact, transparency is a problem throughout the region, as evidenced in rankings at the 2007 Corruption Perceptions Index (CPI), published by Transparency International (TI). The CPI is measured on a scale ranging from 0 to 10, with higher numbers indicating less corruption. Qatar clinched the top GCC list by being ranked at number 32 worldwide having collected six out of 10 points. For its turn, Saudi Arabia was ranked the least transparent GCC state, ranked 79 globally.
Still, oil is a mixed blessing for GCC countries. True, oil prices are at historically high levels nowadays, almost reaching $100 per barrel. Some reports suggest that the price of oil could further rise to nearly $150 per barrel in the not too distant future. The trend reflects geopolitical risk in the region (violence in Iraq plus uncertainty regarding the Iranian nuclear programme) besides firm economic growth in key consuming countries.
Nevertheless, oil prices could eventually fall, in turn representing an element of instability. Worse, GCC states are notably reliant on the petroleum sector. For instance, the petroleum sector accounts for about 90 per cent of Kuwait's treasury income. Certainly, GCC states have the opportunity to employ the extra oil proceeds to diversify the economies away from the petroleum sector.
- The writer is a Member of Parliament, Bahrain.
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