World Economy

(P)GCC Moves Further Into Negative Terrain

(P)GCC Moves Further Into Negative Terrain (P)GCC Moves Further Into Negative Terrain

The Moody's rating agency downgraded Saudi Arabia's long-term issuer rating by one notch to A1 but gave the kingdom a stable outlook, saying sweeping economic reforms announced by the government last month might stabilize the state budget.

In late April deputy crown prince, Mohammed bin Salman, revealed Saudi Arabia's biggest policy shake-up in decades, including tax rises, an efficiency drive and plans to give a bigger role to the private sector, Reuters reported.

"The government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilize its credit profile and which could, if achieved, offer a route back to a higher rating level over time," Moody's said.

However, the agency said it was still uncertain how Saudi Arabia would fund a massive budget deficit averaging 9.5% of gross domestic product between 2016 and 2020, which would require total financing of $324 billion.

Financing Problem

"It is not yet clear how this cumulative financing need will be met: while Saudi Arabia's low levels of government debt at 5.8% of GDP in 2015 provide fiscal space, no medium-term funding strategy has yet been announced," Moody's said.

The agency also downgraded Oman by one notch to Baa1 with a stable outlook, and cut Bahrain by one notch to Ba2, deeper in junk territory, with a negative outlook.

Both countries lack the huge financial and oil reserves of their wealthy neighbors.

While Bahrain can expect support from its ally Saudi Arabia in a crisis, it is likely to find it increasingly hard to borrow in the international markets, particularly since it will be competing for money with its neighbors, Moody's said.

"The further deterioration in the government's balance sheet, combined with increased external debt issuance from other countries in the region, will lower the supply of external funding, thereby heightening the risk that finance is obtainable only at much less affordable rates for Bahrain, or potentially reduced amounts."

Moody's also confirmed the Aa2 ratings of the United Arab Emirates and its biggest member, Abu Dhabi, but assigned a negative outlook to them.

The UAE has been more proactive than its neighbors in restraining spending and reforming its finances in an environment of low oil prices, but Moody's said the government's policies to cut its budget deficit were still not clear.

Moody confirmed the Aa2 ratings of Kuwait and Qatar but gave both of them a negative outlook.

Banks' Slowdown

Banks in the (Persian) Gulf Cooperation Council region (comprising Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) will experience more “pronounced” slowdown in 2016 and 2017 due to weak economic environment, S&P Global Ratings Agency issued a report last week.

It detailed how the current sluggish environment will impact the region's banking sector, particularly the Islamic banks.

As of 2015, customer deposits in Islamic banks already slowed to 9.2%, compared with 16.9% in 2014. The trend is expected to continue this year and in 2017, given that oil price-dependent deposits of government and their related entities account for between 15% and 40% of total (P)GCC bank deposits.

S&P predicts that Islamic banks' profitability will also deteriorate during the same period, while the slowdown in the economy will be more pronounced in Saudi Arabia and UAE.

"In Saudi Arabia, we expect that the government will cut spending by close to 15%. In the UAE, we see the current trend in the real estate sector resulting in fewer growth opportunities for Islamic banks, although investments related to Dubai Expo should help create some opportunities."

“Nevertheless, we think that (P)GCC Islamic banks have built sufficient buffers to navigate through this new environment with manageable deterioration of their financial profiles,” S&P Global Ratings said.

S&P Global Ratings now forecasts oil prices to hit $50 per barrel in 2018, with unweighted average economic growth of the six (P)GCC countries of 2.1% in 2016 and 2.5% in 2017.

“As a result, we expect a more pronounced slowdown of the growth of both conventional and Islamic banks in the (P)GCC. Asset growth started to moderate in 2015, reaching 7% for Islamic and 5.7% for conventional banks in 2015, compared with 12.3% and 9.6%, respectively, in 2014.”