Qatar's foreign currency ceiling was lifted two notches to A3 from Baa2. It is now the third highest rated sovereign in the Middle East - only Kuwait and the UAE are rated higher by Moody's.

'The [Qatari] upgrades are supported by a strategy of economic development based on diversification away from oil and investment in gas-related projects,' says Moody's. 'Careful planning has led to an effective use of large-scale borrowing, and this policy is now starting to pay significant dividends, gradually leading to the creation of new wealth accompanied by diminishing debt ratios.'

Qatar's total external debt was estimated at $12,300 million, or 76 per cent of gross domestic product (GDP), at the end of 2001. However, Moody's estimates that debt service obligations are 'well within the economy's capacity at about 14 per cent of exports'.

Moody's adds that as most of the country's borrowing is against projected export earnings, access to international capital markets remains good. Qatar has staged two sovereign bond issues - $1,000 million- worth of 10-year paper in May 1999 and $1,400 million of 30-year instruments in June. Appetite for the bonds was strong at launch and they have maintained a good following since. The string of upgrades in Qatar's credit ratings has led to significant tightening in the spreads on both issues. On the first day's trading after Moody's latest upgrade the spread on the 10-year bonds narrowed by 15 basis points (bp) to 122 bp over US treasuries, and the long bond's spreads moved in 7 bp to 265 bp - its launch spread was 385 bp.

Moody's raised Bahrain's foreign currency ceiling for bonds two degrees to Baa3/P-3 from Ba1/NP and the foreign currency ceiling for onshore bank deposits to Baa3/P-3 from Ba2/NP. The foreign currency issuer rating for the government of Bahrain now stands at Baa3. The upgrade acknowledges prudent fiscal discipline characterised by restraint on current expenditure and improved budget balances, but is constrained by government dependency on revenues from the Abu Safah offshore field that lies in Saudi Arabia's territorial waters.

Bahrain is yet to issue a sovereign bond - though it did secure a $600 million term loan priced at 75 bp over Libor earlier in the year (MEED 12:4:02). Bankers say that the sovereign upgrade might lead to more detailed negotiations over a possible bond debut, but add that no issue is imminent.

'The two upgrades do not come as any surprise,' says an international banker active in the region. 'The Qatari story is excellent - it's the best story in the region by a mile - and Bahrain is on the right track. What is important is that Moody's has kept good clear water between the two countries: this is important in the light of S&P's [ Standard & Poor's] moves.'

The three-notch differential between Qatar and Bahrain maintained by Moody's is not matched by S&P, which recently issued a first-time foreign-currency rating of A- to Bahrain, putting it on the same level as Qatar (MEED 19:7:02). 'S&P can put them on the same ratings but there is no way the market is going to take the same view: Qatar will continue to have access to cheaper finance,' says another international banker in the Gulf.