World Economy

S&P Downgrades S. Arabia, Bahrain, Oman

S&P Downgrades S. Arabia, Bahrain, OmanS&P Downgrades S. Arabia, Bahrain, Oman

Saudi Arabia, Bahrain and Oman were among the oil-producing nations to have their credit ratings cut by Standard & Poor’s.

Saudi Arabia’s credit grade was cut two levels from A+ to A- due to the “marked and lasting impact” of low oil prices on the economy of OPEC’s biggest producer, Albawaba reported.

Oman saw its credit rating lowered to BBB-, the brink of junk status, following a previous cut in November. Bahrain’s rating was lowered from BBB- to BB, two steps below investment grade.

Saudi Arabia’s rating was previously downgraded less than four months ago, falling one level to A+ in late October when Brent was hovering around $50 a barrel.

Oil prices reached $34.50 a barrel on Thursday following an agreement between Saudi Arabia, Russia and other nations to curb production. S&P said it did not expect the deal to have a material impact on its price assumptions.

Saudi Arabia’s real per-capita gross domestic product will fall below its peers and the average annual increase in the government’s debt could exceed 7% of GDP through to 2019, S&P said.

However, the agency’s rating was stable in anticipation that the country would take steps to prevent any further deterioration of its fiscal position.

Bahrain had sold debt just a day before the ratings cut, issuing $450 million of an existing bond due in 2021 and $300 million of an existing bond due in 2026. S&P predicted the government’s debt could reach 77% in 2017.

 Subsidy Reforms Needed

While fuel subsidy reforms in members of the (Persian) Gulf Cooperation Council (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) will help address pressure from low oil prices on public finances, these measures alone will not be enough to bring the governments’ budgets back into surplus, Moody’s Investors Service reported.

“Recent moves to reform subsidies signal political willingness to address the damaging effect of low oil prices on budgets. However, they fall short of the scale of economic and fiscal reform required to achieve budget balance,” said Mathias Angonin, an analyst at Moody’s, commenting on the Moody’s Investors Service report entitled “Fiscal gains of fuel price hikes are small relative to government deficits”.

“While the (P)GCC governments’ balance sheets remain solid on a consolidated basis, we anticipate a sharp deterioration in the governments’ net asset position as a consequence of the decline in oil prices.”

According to the rating agency, the (P)GCC’s savings from increased fuel prices will likely be small–an average of 0.5% of GDP in 2016. Even if governments opt to link fuel price hikes to global oil prices, the gains would be much lower than the expected fiscal deficit of 12.4% across the (P)GCC, says Moody’s.

This is based on Moody’s forecast of oil prices remaining at around $33 per barrel in 2016, having fallen by 67% from 2014 levels and 32% from 2015 levels.