According to Moody’s Investors Service in the GCC, after their rating actions on 26 GCC banks declared that “A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks.” Reuters reported late last week that Saudi Arabia and two of its neighbours had their debt ratings cut by a notch by Moody’s.
The downgrade of Saudi Arabia’s was on its long-term issuer ratings with however a stable outlook. That of Oman’s on its credit rating whereas that of Bahrain’s was aligned with junk.
The Gulf economies that rely heavily on the revenues from oil exports to finance large-scale infrastructure projects so are having difficulties due to the collapse in energy prices. Most of these countries however, are planning to counter through the introduction of measures, certain never heard of before. These such as cutting spending, raising taxes, reducing subsidies, drawing on their accumulated foreign reserves and issuing debt are believed to be effective within the year. the impact of these measures have yet to be appraised and made known.
in the meantime, the oil revenues slump has brought Saudi Arabia’s budget deficit to nearly $100 billion last year with its reserves held mainly in America dropped by more than $155 billion.
Moody’s by the way expects these reserves to still reduce more until 2019 to $460 billion. It also estimates the Saudi budget deficit to average 9.5% of its GDP each year between 2016 and 2020.
As mentioned above, Reuters published a number of articles on this story. We are reproducing excerpts of 2 of the most illustrative of the happening.
Moody’s Investors Service cut its debt ratings for Saudi Arabia, Oman and Bahrain on Saturday while assigning negative outlooks to three neighboring states, as low oil prices continue to undermine government finances in the region.
The rating agency downgraded Saudi Arabia’s long-term issuer rating by one notch to A1 but gave the kingdom a stable outlook, saying sweeping economic reforms announced by the government last month might stabilize the state budget.
In late April, Deputy Crown Prince Mohammed bin Salman revealed Saudi Arabia’s biggest policy shake-up in decades, including tax rises, an efficiency drive and plans to give a bigger role to the private sector.
“The government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilize its credit profile and which could, if achieved, offer a route back to a higher rating level over time,” Moody’s said.
However, the agency said it was still uncertain how Saudi Arabia would fund a massive budget deficit averaging 9.5 percent of gross domestic product between 2016 and 2020, which would require total financing of $324 billion.
“It is not yet clear how this cumulative financing need will be met: while Saudi Arabia’s low levels of government debt at 5.8 percent of GDP in 2015 provide fiscal space, no medium-term funding strategy has yet been announced,” Moody’s said.
The agency downgraded Oman by one notch to Baa1 with a stable outlook, and cut Bahrain by one notch to Ba2, deeper in junk territory, with a negative outlook. Both countries lack the huge financial and oil reserves of their wealthy neighbors.
While Bahrain can expect support from its ally Saudi Arabia in a crisis, it is likely to find it increasingly hard to borrow in the international markets, particularly since it will be competing for money with its neighbors, Moody’s said.
“The further deterioration in the government’s balance sheet, combined with increased external debt issuance from other countries in the region, will lower the supply of external funding, thereby heightening the risk that finance is obtainable only at much less affordable rates for Bahrain, or potentially reduced amounts.”
Moody’s also confirmed the Aa2 ratings of the United Arab Emirates and its biggest member, Abu Dhabi, but assigned a negative outlook to them.
The UAE has been more proactive than its neighbors in restraining spending and reforming its finances in an environment of low oil prices, but Moody’s said the government’s policies to cut its budget deficit were still not clear.
Moody confirmed the Aa2 ratings of Kuwait and Qatar but gave both of them a negative outlook.
(Reporting by Andrew Torchia; Editing by Andrew Heavens)
Stock markets in the Gulf look set to rise on Sunday, shrugging off Moody’s decision to cut its outlook for the debt ratings of several Gulf states, after oil prices rallied further on Friday.
Saudi Arabia’s Aa3 rating was placed on review for a possible downgrade, Moody’s said late on Friday; the United Arab Emirates, Kuwait and Qatar were also put on review, while Bahrain’s rating was cut to junk.
But investors may view this as a belated reaction to old news; more important is that Brent crude jumped 4 percent on Friday to near $39 a barrel. This is likely to strengthen sentiment that oil prices have finally bottomed and that Gulf economies will not face further negative surprises.
“This is not really new news,” a Jeddah-based analyst said of the Moody’s ratings. “I believe the bottoming of oil prices will outweigh the negative impact of the cut in outlook to negative.”
Last week bourses in the Gulf were lifted by higher volumes in small and mid-sized stocks that are largely favoured by local traders. Riyadh’s and Dubai’s indexes each rose 4 percent last week, although in Dubai most turnover was concentrated in volatile builder Arabtec, which soared 42 percent last week in speculative trade.
Short-term technicals have also turned positive for Gulf markets, with Saudi Arabia triggering a bullish right triangle by breaking its January peak last week, and Dubai confirming a reverse head & shoulders pattern.
Although Egypt’s index rose for the first time in four days on Thursday, most stocks were sluggish as investors remain hesitant to buy the market because of a possible interest rate hike, after bond yields rose, and a weakening currency in the black market, which has increased speculation about a possible devaluation. (Reporting by Celine Aswad; Editing by Andrew Torchia)