Standard & Poor's Ratings Services today said it had assigned its 'A-' long-term and 'A-2' short-term foreign and local currency ratings to the Socialist People's Libyan Arab Jamahiriya (Libya). The outlook is stable. At the same time, a Transfer & Convertibility assessment of 'A-' was assigned. With this rating, Standard & Poor's now rates 125 sovereigns worldwide.
"The ratings on Libya are supported primarily by what we consider is one of the strongest balance sheets among 'A' rated sovereigns, comprising substantial public assets and negligible debt; relatively low financial contingent liabilities; and the solid medium-term growth prospects of the country's energy sector," Standard & Poor's credit analyst Ben Faulks said. "The ratings are constrained by our view of the limited transparency of official decision-making in Libya compared with that in many of its peers, as well as uncertainties surrounding the effectiveness of reforms to promote private sector development, which are at an early stage of implementation. We believe Libya's economic structure is not as developed as most peers with, for example, the banking sector in the early stages of modernization."
We expect the sharp fall in oil prices and OPEC-driven cuts in production to cause a significant contraction of real and nominal GDP in 2009. Yet Libya's balance sheet, which has strengthened rapidly in recent years due to rising oil prices and production, gives it ample scope to confront likely fiscal and current account deficits and to moderate what we believe could otherwise be a significant shock to the economy. Moreover, we view Libyan banks and companies as relatively sheltered from the global financial turmoil, as external liabilities are minimal.
We see medium-term growth prospects as promising. International oil companies have shown great interest in Libya since it emerged from international isolation, attracted by low production costs and the fact that some 75% of the country remains unexplored. Following years of international isolation, Libya suffers an infrastructure deficit compared with most peers, and we expect economic growth will be supported by the drive to remedy this.
The main constraint on the ratings on Libya is our belief that decision-making is more centralized and the political process more complex than in many 'A' rated peers, leading to less predictability in policy-making. There are uncertainties, too, concerning succession to the long-standing leader, Muammar Qadhafi. However, Libya appears committed to the process it launched in earnest in 2003 of rebuilding its economic and political links to the rest of the world, given that this is already paying tangible economic and social dividends.
The stable outlook balances Libya's sizable financial buffers, which we believe are sufficient to carry it through the global recession with limited disruption to the country's development plans and promising medium-term economic growth prospects, with institutional weaknesses that cloud policy-making transparency.
"The ratings could be raised if we see evidence of institutional reforms enhancing the predictability of economic policymaking, and if the government balance sheet further strengthens," Mr. Faulks said. "Conversely, the ratings would come under downward pressure if our expectations of a relatively benign investment environment in the strategically important hydrocarbons sector, as well as the prudent management of public finances through the global economic downturn, fail to eventuate."
