Analysis

GCC Countries and Credit Rating Cuts - Part I

Executive Summary

 

Sovereign credit risk has become a major limitation for investors worldwide after the 2008 debt crisis, which affected both developing and developed economies. Sovereign credit ratings directly affects liquidity in the economy and the foreign investment it receives. At a micro level, sovereign ratings influence corporate ratings, which affect a company’s 1) access to debt market (particularly foreign debt), 2) cost of debt (rises with lower rating), and 3) flow of capital from institutional investors such as insurers, financial institutions, and pension funds.

 

Any upgrade/downgrade in a sovereign rating/outlook has an explicit impact on the broad economic position and sociopolitical profile of a country.

 

All members of the Gulf Cooperation Council (GCC) have traditionally been aligned primarily with oil fundamentals. As GCC members are oil-driven economies, oil price/production has a direct impact on government revenue, fiscal deficit, foreign asset reserve, and other parameters. Thus, any change in oil fundamentals will directly affect the sovereign ratings of GCC countries, albeit differently.

 

This report focuses on the inter-relationships between oil prices and the impact on government financials by analyzing historical sovereign ratings vis-a-vis oil price.

 

Bahrain – Rating downgraded by all agencies

 

According to The Economist Intelligence Unit, Bahrain’s budget deficit is expected to surpass 10% of GDP in 2015. Furthermore, real GDP growth is expected to fall below 2% during the period due to weak crude prices and flat oil production. We believe Bahrain’s sovereign credit rating is at a higher risk as the economy is relatively more impacted by any volatility in crude prices vis-à-vis other GCC members.

 

Rating history

Moody’s was the first agency to downgrade Bahrain’s rating to A3 (since 2000) due to a significant rise in fiscal break-even oil price. According to the International Monetary Fund (IMF), Bahrain has the highest fiscal break-even oil price among GCC members, estimated at USD 99.8/bbl for 2015 and USD 110.3/bbl for 2016.

 

Credit rating timeline and oil/index price chart

 

 

 

Saudi Arabia – Rating intact but outlook cut to negative by S&P

 

Among all GCC members, Saudi Arabia is considered to have the strongest fiscal position. However, falling crude prices are expected to affect the Saudi economy. Moody’s expects government deficit to increase to 12%+ in 2015 vis-à-vis 0.6% in 2014 owing to a significant fall in oil prices. Nevertheless, Saudi Arabia has significant foreign reserves, which represented almost 100% of GDP in 2014. The Saudi government is using these reserves to bridge the budget deficit due to falling oil prices.

 

Rating history

Saudi Arabia never faced a downgrade since 2000 until February 2015 when S&P cut its outlook from stable to negative. The cut was primarily due to a significant fall in oil prices, which is expected to have a negative impact on government revenue. Although King Salman’s USD 29bn public spending announcement is a long-term positive, it could impact fiscal balance in the near term. Meanwhile, Moody’s and Fitch have assigned a stable outlook to Saudi Arabia, with an opinion that the country would sustain fiscal discipline even with low oil price levels primarily because of low debt (1.6% of GDP in 2014) and huge foreign reserves.

 

Credit rating timeline and oil/index price chart

 

 

 

Qatar – Rating intact

 

Qatar is considered to have a relatively strong fiscal balance with solid foreign assets and extremely high per capita energy production. Its net foreign assets in 2014 represented 130% of GDP. Industry estimates suggest Qatar’s fiscal balance would gradually decline in 2015 and 2016, primarily due to lower hydrocarbon output and heavy public spending (100% of GDP in the next three years).

 

Rating history

Qatar’s credit rating has not been downgraded since 2000. However, given the Qatari government’s social spending commitment and a decline in the country’s crude production, credit rating agencies may adopt a more cautious approach amid a weaker-than-expected oil price scenario.

 

Credit rating timeline and oil/index price chart

 

 

 

Kuwait – Rating intact

 

Kuwait’s fiscal position has been strengthened by significant foreign assets (270% of GDP at the end of 2014) and an extremely low debt-to-GDP ratio. Despite being a heavily oil-dependent economy, Kuwait can absorb any shock in oil prices. This is primarily due to its low fiscal break-even oil price at USD 57/bbl for 2016. Comparing this with an oil price outlook of USD 67/bbl (by the IMF), we believe Kuwait is well placed to tackle falling crude prices.

 

Rating history

Kuwait’s sovereign credit rating has not been downgraded since 2000. Fitch has recently affirmed Kuwait’s rating at AA, with an oil price assumption of USD65/bbl for 2015 and USD75/bbl for 2016. As these assumptions are higher than the IMF forecasts of USD 60/bbl and 67/bbl for 2015 and 2016, respectively, we could not completely erase the possibility of any downgrade in outlook if oil price worsens.

 

Credit rating timeline and oil/index price chart

 

 

 

UAE – Rating intact

 

The IMF expects the UAE to witness fiscal deficit in 2015 and 2016 owing to the recent weak oil prices. However, strong foreign asset reserves should help the country to comfortably finance any fiscal deficit. Although the UAE's fiscal break-even oil price is ~USD 80/bbl, Abu Dhabi's foreign exchange reserves would continue to cushion the impact of lower oil prices, thereby limiting the impact on the economy’s fiscal strength.

 

Rating history

The UAE’s sovereign credit profile has not witnessed any major change since 2000.

 

Credit rating timeline and oil/index price chart

 

 

 

Oman – Rating downgrade

 

The IMF has recently projected that Oman's non-hydrocarbon growth rate would decline from 6.5% in 2014 to 5.0% in 2015–16 and 4.5% in 2017–20. Furthermore, the IMF has projected Oman’s fiscal deficit at 14.8% of GDP in 2015, given relatively high fiscal break-even oil prices. Financing such deficits may increase debt-to-GDP ratio to 25% by 2020 (versus 4.8% in 2014) even after exhausting fiscal buffers.

 

Rating history

Given the recent concerns the IMF has expressed (first time since 2000), Moody’s has lowered its outlook for the country to negative and S&P has downgraded the country’s rating in 2015. As rightly indicated by the IMF, any delay in fiscal adjustment to bring consolidation could further worsen Oman’s credit outlook.

 

Credit rating timeline and oil/index price chart

 

 

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