Moody's Investors Service Tuesday upgraded the long-term foreign and domestic currency government bond ratings and the country ceilings for long-term foreign currency bank deposits of five Gulf countries to reflect the significant ongoing strengthening of their public and external finances. The governments affected are Bahrain (upgraded to A2 with stable outlook from A3), Kuwait (upgraded to Aa2 with stable outlook from Aa3), Oman (upgraded to A2 with stable outlook from A3), Qatar (upgraded to Aa2 with stable outlook from Aa3), and Saudi Arabia (upgraded to A1 with positive outlook from A2).
The country ceilings for long-term foreign currency bonds have been upgraded in the case of Bahrain (upgraded to Aa3 with stable outlook from A1) and Oman (upgraded to Aa3 with stable outlook from A1). The country ceilings for short-term foreign currency bank deposits were upgraded in the case of Bahrain (to P-1 from P-2) and Oman (to P-1 from P-2).
"The marked improvement in the economic fundamentals of the Gulf countries has mainly been caused by the sustained rise in global hydrocarbon prices over the past five years. However, we have also been encouraged by the relatively prudent 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 and that there has been a healthy bias towards more productive capital than current spending, although the pace of overall government expenditure is growing rapidly in nominal terms and has accelerated across the GCC as a whole over the past three years. Most governments are also proceeding with structural reforms aimed at boosting the role of the private sector despite the jump in government revenues, he added.
"At the same time, the regional political environment remains challenging," Cooper said. Key concerns are the mounting tensions between Iran and the US/UN over the nuclear issue, the chaotic political situation in Iraq, the continued threat posed by Islamist militancy across the region, and the 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 longer term. The strength of domestic institutions in the GCC tends to lag that of highly rated countries in other regions and there are questions regarding the
path of political succession within the ruling families of some Gulf countries.
Nevertheless, Moody's said that the conspicuous improvement in the economic strength of the Gulf states justifies the ratings upgrade as it has enhanced the governments' ability to withstand both political and economic shocks. "Given the GCC governments' large and growing asset positions and low levels of debt, it would take a severe and sustained adverse political scenario to cause a government bond default either in local or foreign currency," said Cooper. 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 difference in the relative ability of Gulf governments to service their debt -- between the very wealthy Gulf states Kuwait, Qatar, and the United Arab Emirates and the less wealthy states Bahrain, Oman, and Saudi Arabia which have less hydrocarbon reserves per capita and somewhat weaker government balance sheets. Moody's ratings will continue to reflect these distinctions.
