Thursday, May 26, 2016

Dubai: All GCC countries have initiated a number of economic and fiscal reforms to counter the impact of decline in oil prices on public finances; however the effectiveness of these reforms will depend on institutional strength of each country, according to rating agency Moody’s.

Moody’s in a recent review of the ratings of GCC countries considered each sovereign’s capacity to formulate and implement effective policy responses to the lower oil prices. The review concluded with a downgrade of three GCC sovereign ratings, and a negative outlook assigned to four ratings that were confirmed.

“During our recently concluded review for downgrade of GCC sovereigns, we looked at each sovereign’s institutional capacity to implement an effective response to low oil prices. Low oil prices are testing even strong institutions,” said Mathias Angonin, a Moody’s Analyst.

While huge reserve buffers are a key credit support for many GCC sovereigns, analysts observed that high degree of opacity in policymaking and fiscal buffers compared to global peers seen as a major institutional constraint.

Earlier this month Moody’s downgraded ratings of Saudi Arabia (to A3), Oman (to Baa1) and Bahrain (to Ba2) while the ratings of the UAE, Qatar and Kuwait were maintained at Aa2 with negative outlook.

“Most GCC sovereigns have outlined policy measures including subsidy reforms, new taxes and diversification of the economic base. But given the significant challenges of responding to the oil price shock, lack of clarity around specifics and/or implementation risks have prompted us to assign negative outlooks to even the strongest GCC countries and downgrade three of the six country ratings,” said Angonin.

In its assessment of institutional framework of GCC countries Moody’s has incorporated World Bank’s Worldwide Governance Indicators (WGI). While Qatar and the UAE stand out, with high governance scores compared to rating peers, the scores of Bahrain and Oman have been relatively stable, ranking toward the middle of Moody’s rated sovereigns. Kuwait and Saudi Arabia have weaker scores than many of their similarly rated peers.

“Qatar and the UAE stand out, as their WGI scores are relatively high and have been improving. They are also broadly in line with the median for Aa-rated peers. The two countries, which have open and competitive economies, have imported institutional features from around the world and developed rapid and efficient decision-making frameworks,” said Angonin.

Bahrain and Oman have similar, relatively stable scores, and rank toward the middle of Moody’s rated sovereigns. Bahrain has long had a strong banking supervision and legal system, unaffected by recent political unrest, while Oman’s scores tend to reflect lower policy predictability since 2010.

Saudi Arabia’s scores have been rising from a low base relative to regional and global peers. The government has developed its institutional capacity from a low level of openness. It has also strengthened economic and financial regulation, although there remain key institutional weaknesses, Moody’s said.

Regional surveys indicate that Saudi Arabia is perceived as the most difficult place to do business among GCC countries; while certain regulations and procedures are being simplified, the state bureaucracy contributes to the unpredictability of the regulatory framework.

Kuwait’s scores have been deteriorating due to long and burdensome executive and legislative processes, illustrating how institutional blockages can hamper policy implementation. Along with China (Aa3 negative), Kuwait has the weakest Institutional Effectiveness scores of all Aa-rated countries.

By Babu Das Augustine Banking Editor

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