Moody’s upgrades UAE and Kuwait credit outlook, cuts Qatar’s debt rating

The actions by Moody’s late on Friday came shortly after the decision by Opec, of which all three countries are core members, to continue restraining output until the end of next March at least.

The Opec chairman, Saudi oil minister Khalid Al Falih, talks to journalists during the oil group's meeting in Vienna, Austria on Thursday. Leonhard Foeger / Reuters
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Moody’s Investors Service has upgraded its creditworthiness outlook for both the UAE and Kuwait, but downgraded its debt rating for Qatar, which the rating agency noted has run up a much higher foreign debt load than its peers.

The actions by Moody’s yesterday came shortly after the decision by Opec, of which all three countries are core members, and some non-Opec states to continue restraining output until the end of next March at least.

Opec and its non-member partner countries on Thursday agreed it was necessary to commit to another nine months of production restraint when the initial deal expires at the end of next month to ensure oil prices do not collapse again to the levels of last year, when world benchmark North Sea Brent crude fell below US$30 per barrel to its lowest level in 12 years and averaged around $44 for the whole year.

The collapse in oil prices over the past two-and-half years has put severe strain on the finances of oil-dependent countries.

Even though the output restraint deal, which took effect in January, has pushed Brent prices up to an average of just below $53 per barrel so far this year, the countries bearing the heaviest burden in terms of output cuts – which include the UAE, Kuwait and Qatar – have seen the price benefit eroded by their production cuts.

As the IMF forecast this month, real GDP growth for GCC oil exporters will be 0.9 per cent this year, down from 2 per cent last year and 3.8 per cent the previous year, based on the assumption that their output restraint deal remains in place.

For its part Moody’s is forecasting UAE economic growth of 1.7 per cent this year, versus 2.7 per cent in 2016.

It is also forecasting that the UAE Government deficit will decline to 1.9 per cent of GDP this year from 3.9 per cent in 2016.

GCC members have varying capacities to stand up to the current economic strain, mainly because of the success or otherwise of efforts to reform their economies.

In downgrading Qatar’s long-term debt rating from Aa2 to Aa3 but changing its outlook to stable from negative, Moody’s pointed to the country’s sharply rising external debt and doubts about its model to promote economic growth.

Moody’s says Qatar’s external debt-to-GDP ratio rose to 150 per cent last year, up from 111 per cent the year before and the highest of any similarly rated country, whether oil-dependent or not.

Qatar’s economic growth over the past 13 years has been primarily based on the rapid growth of its oil and gas sector, as well as government infrastructure spending. Qatar’s population in that period has quadrupled to 2.6 million, which in turn has driven the rapid growth of private consumption.

But as huge front-loaded projects – including those related to Qatar’s hosting of the 2022 Fifa World Cup – run off, there is a risk of a rapid decline in non-indigenous population and private consumption, which in turn would keep the external debt burden high.

Moody’s notes that while the UAE faces some of the same issues, the country’s relative success in diversification is behind its better fiscal and growth prospects.

The oil and gas component of the economy fell from 37.5 per cent of GDP to 31 per cent in the decade through last year, even though output of hydrocarbons over the same period grew by 10 per cent.

“The UAE’s relatively diversified economy and strong competitiveness allow it to raise fiscal revenue from non-oil sectors while containing the impact on long-term growth,” according to Moody’s assessment.

Moody’s likewise pointed to the progress of diversification when it upgraded Abu Dhabi’s outlook to stable from negative last week.

Further, the UAE ranks well above its peers as a place to do business, which has helped particularly in developing diverse business segments in Dubai.

The UAE was in 26th place on the World Bank’s 2017 Doing Business ranking, while Qatar was down at 83rd, out of a total 190.

But though Kuwait was in a dismal 102nd place in the World Bank ranking, Moody’s says the country’s sheer wealth means its creditworthiness is on the up.

“Despite Kuwait’s slower fiscal and economic reform progress relative to other highly-rated peers in the Gulf in response to lower oil prices, the sovereign’s extraordinarily strong balance sheet, very high wealth levels and vast hydrocarbon reserves” mean its finances are not vulnerable at this time.

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