GCC sovereign outlook seen stable despite several challenges: Moodys

Mubasher: Outlook for sovereign creditworthiness for GCC members for 2019 is seen “stable overall”, according to Moody’s Investors Service, which explains that this stability reflects its forecasts for fundamental credit conditions that will drive sovereign credit over the next 12 to 18 months.

“Stronger oil prices during most of 2018 reduced fiscal and external pressures for GCC countries in the short term,” the report released early Wednesday showed. However, it said that periods where oil prices were high “tend to undermine the impetus for governments to diversify their fiscal bases and rein in spending, leaving their credit profiles exposed to future phases of lower oil prices.”

As for the outlook for 2019, Moody’s projected that geopolitical tensions would remain a “key source of risk” and a catalyst for increased spending on military matters.

Similarly, if nationalisation policies do not provide additional job opportunities in GCC members and match the demand from nationals, this would pose both political and social risks, Moody’s report titled “Sovereigns -- Gulf Cooperation Council, 2019 outlook is stable, but fiscal reform, geopolitics and unemployment pose challenges” said.

Over the course of 2018, several GCC members began nationalising jobs and sectors. The most prominent was Saudi Arabia’s drive to reduce foreign employment and increase the number of Saudis in its workforce. Similarly, the UAE, Oman, and even Qatar have undertaken similar initiatives to hire their citizens and reduce reliance on expats.

Of the six GCC members, five have a stable outlook, while only Oman has a ‘Baa3 negative’ rating and a negative outlook.

However, at the beginning of 2018, three GCC countries had negative outlooks, the agency said, noting that although chances of downgrades have “diminished,” the main reasons is lower rating levels.

In terms of gross domestic product (GDP) growth in 2019, Moody’s projected that most members will see no change in that area, as the decision taken by the Organization of Petroleum Exporting Countries (OPEC) to reduce output would likely result in “stable or slightly decelerating oil GDP growth.”

As for non-oil GDP growth, Moody’s expects a slight pick-up in 2019 for the six GCC member states.

“Against that backdrop, Moody's expects unemployment to be broadly unchanged or rise slightly further across the region. Over the longer term, demographic trends will cause joblessness to climb, unless the participation of nationals in the private sector increases significantly,” the report highlighted.

With GCC members having completed their fiscal reforms, Moody’s projects that oil prices and production would have the most impact on fiscal balances in 2019.

Moody’s assumption for oil prices in 2019 is at $75 per barrel, which would allow fiscal balances to “strengthen modestly” compared to 2018. Despite that, it is worth noting that the sharp drop in oil prices towards the end of 2018, or in Q4-18, reflected GCC governments’ credit profile vulnerability to future price drops.

If oil continues to trade near $60 per barrel, it is likely that GCC members’ budget deficits and debt would widen and rise above Moody’s current projections.

“Geopolitical tensions will also continue to simmer and could escalate in 2019 if the reimposition of economic sanctions on Iran prompts it to embark on a more interventionist foreign policy stance in the Middle East,” Moody’s stressed.

It noted that military spending in most GCC members was “already elevated,” indicating that the emergence or rise in political tension may prompt additional defence spending, which would further pressure fiscal balances.

“A closure of the Strait of Hormuz by Iran would have a sizeable impact on GCC sovereigns' credit profiles, but remains relatively unlikely,” Moody’s concluded.