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19 January, 2016

Creditworthiness of Middle East sovereigns on the decline

The overall creditworthiness of Middle East and North Africa sovereigns, including the GCC sovereigns has deteriorated over past six months with Saudi Arabia, Oman and Bahrain facing negative rating outlook in the context of rising fiscal pressures, according to rating agency Standard & Poor’s.

Tuesday, Jan 19, 2016

Dubai: The overall creditworthiness of Middle East and North Africa (MENA) sovereigns, including the GCC sovereigns has deteriorated over past six months with Saudi Arabia, Oman and Bahrain facing negative rating outlook in the context of rising fiscal pressures, according to rating agency Standard & Poor’s.

Assuming average crude prices of $45 (Dh165) for the current year, S&P expects current ratings and outlooks to hold for GCC countries as many of them continue to retain substantial government reserves and have initiated fiscal reforms to balance budgets and contain reserve erosion.

“In October 2015 we downgraded Saudi Arabia’s ratings to ‘A+’ from ‘AA-’ due to the deterioration in the Kingdom’s fiscal position. Saudi Arabia’s general government fiscal deficit widened to about 15 per cent of GDP in 2015, from 1.5 per cent in 2014, primarily reflecting the sharp drop in oil prices. Absent a rebound in oil prices, we now expect general government deficits of 10 per cent of GDP in 2016, 8 per cent in 2017, and 5 per cent in 2018, based on planned fiscal consolidation measures,” said Standard & Poor’s sovereign analyst Trevor Cullinan.

If the oil price remains low over an extended period, GCC countries such as Saudi Arabia, Oman and Bahrain are likely to face further deterioration in their creditworthiness.

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“In November 2015 we lowered our ratings on Oman to ‘BBB+’ from ‘A-’. The downgrade resulted from our expectation that a period of sustained low oil prices will impair the country’s fiscal and external balances. We have negative outlooks on Bahrain and Saudi Arabia, reflecting weakening, fiscal profiles and uncertain policy responses,” Cullinan said.

Recent fiscal consolidation efforts such as spending cuts, subsidy reforms and planned introduction of direct and indirect taxes are expected to improve the fiscal position of GCC sovereigns and will have positive impact on their ratings, according to S&P.

Privatisation and sale of government assets and debt government debt issuance are expected to boost government finances in the medium term. The Saudi government has already announced that it will move ahead with privatising airports and airport services this year, although it is unclear at this stage how much revenue this would raise. There has also been discussion around the potential privatisation of Saudi Aramco or its upstream/ downstream assets. Saudi Aramco is conservatively valued at $2.5 to $5 trillion, so even a 10 per cent IPO could yield $500 billion, nearly doubling the current level of SAMAs Net Foreign Assets.

While Saudi Arabia has issued $30.5 billion debt last year in the domestic market, the country is expected to tap both domestic and global bond markets to fund its budget deficits.

According to S&P, the current negative outlook of Saudi reflects the challenge of reversing the marked deterioration in Saudi Arabia’s fiscal balance. “We could lower the ratings within the next two years if Saudi Arabia did not achieve a sizable and sustained reduction in the general government deficit, or its liquid fiscal financial assets fell below 100 per cent of GDP. The ratings could also come under pressure if domestic or regional events compromised political and economic stability. We could revise the outlook to stable if the combination of policy choices by the Saudi authorities and external economic conditions reduced the government’s financing needs, preserving the government’s strong net asset position,” said Cullinan.

By Babu Das Augustine Banking Editor

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