S&P cuts ratings of Bahrain and Oman

10 February 2015

Low oil price pushes agency to review Gulf ratings

US ratings agency Standard & Poor’s (S&P) has revised its ratings for Gulf states in light of the sharp fall in oil prices, downgrading both Bahrain and Oman.

Bahrain’s rating has been downgraded to BBB-/A-3 with a negative outlook, while Oman’s rating has been lowered to A-A-2, with a stable outlook.

Other Gulf countries fared better. Saudi Arabia retained its current high rating of AA-/A-1+, although it did have its outlook revised to negative.

Qatar is the least affected country, with S&P affirming its AA/A-1+, with a stable outlook. Similarly, the emirate of Abu Dhabi also retained its AA rating and a stable outlook.

The ratings review was a result of S&P revising downwards its oil price assumptions between 2015 and 2017; a move which has affected how the agency views the steps governments of the oil-exporting Gulf countries will take to manage their budgets.

In December last year, S&P expected Brent oil prices to average $80 a barrel this year and $83 a barrel between 2015 and 2018. It has revised this to $55 a barrel in 2015 and $70 a barrel in 2015-18.

In this new low oil price environment, S&P sees Bahrain as one of the most vulnerable countries in the region.

It forecasts the oil exporting country’s deficit will “markedly” deteriorate in the coming years, averaging 5.5 per cent GDP between 2015 and 2017, compared with 3.8 per cent as forecast last December.

Bahrain’s government still derives 84 per cent of its revenues from the oil industry. It also has one of the highest break-even oil prices in the region, set at an estimated $125 per barrel in 2014.  

The ratings downgrade also reflects S&P’s uncertainty about the government’s policy response to low oil prices.

The country held parliamentary elections last November and the 2015-16 budget is still under parliamentary review.

While the budget will feature cuts in capital spending, political pressures will result in smaller cuts in other areas of spending.

S&P’s projections for this year see the country’s general government deficit widening to 8 per cent of GDP.

Oman’s government is also set to see increased pressure on its finances due to the low oil prices, forecasts S&P.

In Oman oil accounts for just under half of the country’s GDP, slightly over 50 per cent of exports and 75 per cent of the government revenue, making it highly dependent on the oil industry.

Oman’s 2015 budget assumes an average price of $75 per barrel for Omani crude oil, which falls below S&P’s new assumptions.

Against this backdrop, S&P forecasts Oman will see a fiscal deficit of 4 per cent of GDP in 2015 following five years of surpluses.

Omani government debt is also likely to rise, S&P says, increasing to an equivalent of just under 1 per cent of GDP a year between 2015-2018. This deficit will be financed by liquidating assets and partly by extra borrowing.

The agency also anticipates slightly increased cuts to government spending, but says that there are limits to the cuts the government can make since close to 50 per cent of the spending is related to public sector wages and subsidies, politically sensitive expenditures that would prove difficult to cut.

S&P sees Saudi Arabia as better able to weather the current low oil prices due to its strong government finances, but the agency still anticipates that the government’s fiscal position could weaken and, therefore, revised downwards the country’s outlook.

The kingdom’s 2015 budget has maintained spending plans for the year and anticipates a general government deficit of 6 per cent of GDP this year.

Qatar and Abu Dhabi are the most resilient to the low oil prices. S&P has only marginally revised downwards Qatar’s GDP growth to an average of 4 per cent between 2015 and 2018.

Similarly, S&P sees Abu Dhabi’s government finances as strong enough to withstand low oil prices, despite its undiversified economy.

Follow Rebecca Spong on Twitter: @Rebecca_MEED

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