Moody’s Rates Negative Outlook for (P)GCC

The 2018 outlook for sovereign ratings in the (Persian) Gulf Cooperation Council is negative, reflecting (P)GCC members' muted economic growth, structural challenges and geopolitical tensions in the region, Moody's Investors Service said in a report Monday.

The report, "Sovereigns—(Persian) Gulf Cooperation Council, 2018 Outlook", says: "Although oil prices have risen significantly from their lows in early 2016, most sovereigns in the region will continue to run sizable fiscal deficits and record an increase in their debt burdens over the next 12 to 18 months," said Steffen Dyck, a Moody's vice president—senior credit officer and the report's author, Econotimes reported.

"In addition, long-standing geopolitical event risks have come to the fore again and will play an important role in defining sovereign credit quality in 2018." (P)GCC comprises of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.

Three of the six (P)GCC sovereigns hold negative rating outlooks, while the remaining three have stable outlooks, pointing to the likelihood of fewer downward rating adjustments in 2018 compared to 2017.

Moody's forecasts a slight pick-up in GDP growth of close to 2% in 2018 for the (P)GCC as a whole. While this would be an improvement from GDP stagnation in 2017, aggregate growth will remain well below the average 5% per year seen between 2010 and 2015, given flat oil and gas production and a slow recovery in non-oil growth.

If oil prices stabilize at their current levels, the pace of proactive fiscal consolidation could be slowed because government revenues will be bolstered.

While rising oil prices and fiscal consolidation measures have helped to narrow (P)GCC fiscal deficits from their peaks in 2015 and 2016, the region as a whole will continue to record lower revenues than spending.

On an aggregate basis, the (P)GCC will exhibit an average fiscal deficit of 5% of regional GDP this year and next. This will contribute to a rise in debt levels and a reduction in fiscal reserves for most sovereigns in 2018.

(P)GCC government debt burdens will continue to rise, but at varying speeds. Bahrain's government debt is expected to approach 100% of GDP by 2019, while further increases in the debt burdens of Kuwait and Saudi Arabia will be at much lower levels. Meanwhile, Qatar and, at a much lower level, the UAE, will see their debt loads stabilize in 2018 and 2019.

Regional geopolitical tensions intensified in 2017, as shown by the Saudi-led standoff between Qatar and other three of its (P)GCC neighbors (UAE, Bahrain and Egypt). Moody's expects the diplomatic and economic boycott of Qatar to extend well into 2018 and possibly beyond.