US ratings agency Standard & Poor’s (S&P) has lowered its ratings for Saudi Arabia, Oman and Bahrain as the economies of the three GCC states become increasingly vulnerable to the prolonged period of low oil prices.

The ratings agency last reviewed the three countries in 2015. In mid-January this year, Standard & Poor’s lowered its oil price assumptions for average Brent by about $20 a-barrel over 2016-2019. S&P says it does not expect the agreement on 16 February between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze oil output at the levels reported in January to have a material impact on our oil price assumptions. 

For Saudi Arabia, S&P lowered its foreign- and local-currency sovereign credit ratings to ‘A-/A-2’ from ‘A+/A-1’. The outlook is stable as the ratings agency expects Riyadh to take steps to prevent any further deterioration in the government’s fiscal position.

“…the decline in oil prices will have a marked and lasting impact on Saudi Arabia’s fiscal and economic indicators given its high dependence on oil,” says S&P. “We now expect that Saudi Arabia’s growth in real per capita GDP will fall below that of peers and project that the annual average increase in the government’s debt burden could exceed 7 per cent of GDP in 2016-2019.”

Commenting on the downgrade, London-based Capital Economics said: “We don’t think the decision will have a major economic impact. Against the backdrop of a more than 40 per cent drop in government revenues, an A- rating is good and still leaves Saudi Arabia as investment grade. More fundamentally, the government has a strong balance sheet and the authorities have plenty of options with which to finance a large budget deficit.”

For Oman, S&P lowered its ratings to ‘BBB-/A-3’. Like Saudi Arabia, the stable outlook reflects our expectation that the government will be able to take effective remedial action that would prevent Oman’s fiscal and external positions from deteriorating beyond our current expectations.

“…the hydrocarbon sector accounted for just under half of GDP in 2014, slightly over half of exports, and three-quarters of government revenues. However, the hydrocarbon sector’s contribution to the economy fell to about 35 per cent of GDP over the first half of 2015 following the pronounced decline in oil prices,” says S&P. “Given the country’s high dependence on this commodity, we have revised our forecasts for economic growth and the fiscal and external positions to incorporate the lower expected oil prices.”

S&P has also reduced its real GDP growth forecasts for Oman over 2016-2019 to an average of 1.4 per cent a year from about 3.0%, while our GDP per capita estimate for 2016 has fallen to $14,600 compared with the $16,300 we had expected at its last review.

For Bahrain, S&P has lowered its long- and short-term ratings to ‘BB/B’ from ‘BBB-/A-3’. “Since 2014, when oil prices started to slide, pressure on revenues has become particularly acute in Bahrain; and we think the impact of this lasting trend will exacerbate existing structural frailty in Bahrain’s public finances, despite an active response from authorities,” says S&P.

S&P also affirmed Qatar’s rating at ‘AA/A-1+’ with a stable outlook. “Qatar’s economic growth of about 4% in 2016-2019 will be sustained by its large infrastructure investment program, but the latter will contribute to a deterioration in fiscal and external balances exacerbated by the large fall in hydrocarbon prices since mid-2014.”