Wave of Middle East Countries Downgraded on Oil Prices, Debt Issues

Triggered by factors from lower oil prices to rising debt levels, Moody’s Investment Service this month has downgraded several Middle Eastern countries’ credit ratings outlooks over the near term. Moody’s announced the following credit changes on Saturday:

Saudi Arabia —Downgraded to Aa3 from A1, but assigned a stable outlook. Low oil prices have negatively impacted the government’s finances, as well as external accounts and reserve buffers. Real gross domestic product (GDP) growth is expected to drop to 1.2% this year from 3.5% in 2015, with an average 2% growth figure over the next five years. That tracks much lower than the 5% average reported from 2011 to 2015, Moody’s notes. Still, Saudi Arabia’s plan to reduce economic and fiscal dependency on oil, for instance, even if partially implemented, “should sustain Saudi Arabia’s credit profile at its current level,” Moody’s said.

Bahrain—Downgraded to Ba2 from Ba1, as well as assigned a negative outlook. The rating agency anticipates Bahrain’s government debt burden and affordability to deteriorate significantly during the next two to three years. In 2015, the nation’s fiscal deficit was an estimated 13.1% of GDP, and Moody’s expects that deficit to rise to 16% this year. That agency predicts that will narrow “only gradually” later this decade.

Oman—Downgraded to Baa1 from A3, assigned a stable outlook. Despite fiscal consolidation efforts, the ratings agency expects that a protracted period of low oil prices will negatively impact Oman’s sovereign credit profile more than previously anticipated. The country is vulnerable to oil price shocks, with hydrocarbons accounting for an average of 67% of its total exports and oil and gas revenues composing 87% of government revenue this decade. Moody’s expects real GDP growth to decline 2% this year and by 0.8% in 2017.

Kuwait—Confirmed as Aa2, but assigned a negative outlook. Government finances have deteriorated, with a deficit of 1.1% of GDP in fiscal year 2015 to 2016, down from a surplus of nearly 30% the year before. Moody's believes Kuwait's low levels of indebtedness and its very large reserve buffers provide space to accommodate the deterioration in its fiscal balance. However, Kuwait has a weaker business environment and policymaking than many of its Aa2 peers. Over the medium term, this could erode its economic and fiscal prospects.

Qatar—Confirmed as Aa2, but assigned a negative outlook. Low oil prices are expected to be manageable for Qatar, as the IMF believes the country has a low fiscal and external breakeven point in terms of oil prices at $53 per barrel and $45 per barrel, respectively, for this year and 2017. However, Qatar’s medium-term debt trajectory is very sensitive to small cuts in growth and increases in the average deficit position that could cause a debt burden to divergence from the Aa2 median, Moody’s said.

- Nicholas Stern, NACM editorial associate

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