Moody's Investors Service on Thursday placed the long-term foreign and domestic currency government bond ratings of six Gulf countries on review for upgrade. The governments affected are Bahrain (Baa1), Kuwait (A2), Oman (Baa1), Qatar (A1), Saudi Arabia (A3) and the United Arab Emirates (A1). Moody's said that the rating actions reflect the significant strengthening of the public and external finances of the oil-exporting member states of the Gulf Cooperation Council (GCC).
"This improvement has largely been caused by the sustained rise in global hydrocarbon prices over the past five years. In addition, we have been encouraged by the relatively judicious use of oil export receipts compared with previous oil booms," said Tristan Cooper, a Vice President at Moody's London office. Cooper said that a higher proportion of these receipts has been saved than previously, while extra expenditure has been focused more on capital than on current spending. Most governments are also proceeding with structural reforms aimed at boosting the role of the private sector despite the jump in government revenues, he said. Cooper said that Moody's review will concentrate on how effectively these governments will be able to manage the rising inflow of hydrocarbon export receipts.
"At the same time, the regional political environment remains difficult," said Cooper. Key concerns are the mounting tensions between Iran and the US/UN over the nuclear issue, the chaotic political situation in Iraq, the continued low-level threat posed by Islamist militancy across the region, and the apparent rise of sectarianism. Moreover, it is uncertain how the tentative experimentation with democracy will be handled by the governments of the GCC states, and the rapid inflow of expatriate workers could create social tensions over the medium term. There are also questions surrounding the path of political succession within the ruling families of some Gulf countries.
Nevertheless, Moody's said that the marked improvement in the economic strength of the Gulf states warrants possibly higher government ratings as it has enhanced governments' ability to withstand both political and economic shocks. "Given the GCC governments' large net asset positions and low levels of gross debt, it would take a severe and sustained adverse political scenario to cause a government bond default either in local or foreign currency," Cooper said. The growing reliance of the world economy on oil exports from the Gulf suggests that the international community will strive to prevent such scenarios from occurring. Gulf governments' net asset positions also provide a significant cushion against any severe fall in oil prices, which is in any case not expected.
Despite these shared characteristics, Moody's points out that there remains a significant difference in the relative ability of Gulf governments to service their debt -- for example, between the richer Gulf states such as Qatar, the UAE, and Kuwait, and the poorer Gulf states such as Oman and Bahrain, which have more limited oil and gas reserves. Moody's ratings will continue to reflect these distinctions. Moody's also placed on review for upgrade the country ceilings for
long-term foreign currency bank deposits of Bahrain (Baa1), Kuwait (A2), Oman (Baa1), Qatar (A1), Saudi Arabia (A3), and the United Arab Emirates (A1); while it placed the country ceilings for long-term foreign currency bonds on review for upgrade in the case of Bahrain (A2), Kuwait (Aa3), Oman (A2), and Saudi Arabia (A1). The Aa2 country ceilings for long-term foreign currency bonds of Qatar and the United Arab Emirates were not placed on review because those ceilings are already constrained by the Aa2 local currency guideline. The local currency guideline represents the highest possible rating that could be assigned to obligors and obligations denominated in local currency within a country.
It should be noted that the governments of Saudi Arabia and Bahrain have declined Moody's invitation to participate in the rating process, and have not
communicated with Moody's on credit-related issues for at least 12 months.
