The ratings agency Moody’s has again downgraded the credit ratings of Saudi Arabia, Oman and Bahrain, as lower-than-expected oil prices this year hit the fiscal positions of Gulf states. Abu Dhabi’s rating was affirmed at Aa2.
Saudi Arabia’s rating fell from Aa3 to A1, five notches above junk. Oman is now rated at Baa1, three notches above junk, with Bahrain two notches above junk and under review for further downgrades.
Moody’s is the latest of the three major ratings agencies to cut Gulf credit appraisals on the back of low oil prices. Standard & Poor’s cut Bahrain’s credit rating to junk earlier this year, and downgraded Saudi Arabia’s rating in October and February.
“A combination of lower growth, higher debt levels and smaller domestic and external buffer” would leave Saudi Arabia less well prepared to deal with future economic problems, Moody’s said, while the low oil price will continue to hurt the fiscal positions of Oman and Bahrain.
Abu Dhabi, Qatar and Kuwait were all put on negative ratings outlook, meaning that they are at risk of future cuts to their credit outlook. Moody’s placed Oman and Saudi Arabia on stable outlook, meaning that they do not anticipate further cuts to either country’s credit outlook.
Bahrain remains on negative outlook, because Moody’s “expects [its] debt burden and debt affordability to deteriorate significantly over the coming two to three years”. Bahrain cancelled a bond issue in December after its credit rating was cut to junk by S&P. It then reopened the bond sale days later.
Oman has considerably fewer sovereign wealth fund assets than its Gulf neighbours, which limits its ability to weather low oil prices. The sultanate depends on oil for 87 per cent of its government revenues, and ran a fiscal balance of 16.2 per cent last year.
Moody’s said that Abu Dhabi has been placed on negative outlook because of a “lack of clarity” around government plans to trim the deficit and prevent the depletion of assets at its sovereign wealth funds. Its “very large” fiscal buffers will nevertheless “support economic and fiscal resilience during a period of low oil prices”, Moody’s added.
At about $40 per barrel, average oil prices are set to be lower this year than in 2015, when oil averaged around $50 per barrel, according to the IMF.
The ratings cuts are likely to raise the cost to Gulf states of issuing international debt. Oman, Bahrain and Saudi Arabia are all set to tap international bond markets over the next few years as they seek to finance their widening fiscal deficits.
The IMF expects that the Gulf nations will collectively run a budget deficit of 12.3 per cent this year and 10.8 per cent next year. Gulf states lost $390 billion in export earnings last year, and are set to lose a further $140bn this year.
The oil price has fallen from a high of $110 per barrel in June 2014 to $46.4 now. Brent crude hit 12-year lows in January amid record Opec production and failed discussion between major producers on output cuts.
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