‘Oil price drop to test GCC sovereigns’ institutional strength: Moody’s

Governance frameworks are at various stages of development and diverging

DUBAI, May 26: Gulf Cooperation Council (GCC) countries’ institutional strength will determine their ability to push through economic and fiscal reforms designed to counter the drop in oil revenue, says Moody’s Investors Service in a report.

The report notes that Moody’s recent review of the ratings of GCC countries considered each sovereign’s capacity to formulate and implement effective policy responses to the lower oil prices. The review concluded with a downgrade of three GCC sovereign ratings, and a negative outlook assigned to four ratings that were confirmed.

“Low oil prices are testing even strong institutions,” says Mathias Angonin, a Moody’s Analyst and author of the report. Moody’s assessment of institutional strength incorporates policy effectiveness, governance indicators, and transparency.

Sovereigns have implemented several fiscal measures to adjust to lower revenues. The introduction of a GCC wide value-added tax (VAT) of 5 percent from 2018 will support revenue diversification, while governments are also considering increases in corporate income taxes and taxes on remittances.

The reforms — while positive — will only partly compensate for the continued oil price slump. As such, Moody’s expects that fiscal and external constraints will persist beyond 2016.

Moreover, the social impact of fiscal reforms will make policy implementation tougher for Bahrain (Ba2 negative), Oman (Baa1 stable) and Saudi Arabia (A1 stable), where governments are under pressure to continue redistributing oil revenues to their populations to avoid economic-related civil unrest. In comparison, Kuwait (Aa2 negative), Qatar (Aa2 negative) and the United Arab Emirates (UAE, Aa2 negative) have fewer such constraints.

Governance frameworks are at various stages of development and diverging. Relative to globally rated sovereigns, Qatar and the United Arab Emirates have high institutional strength scores. Bahrain’s and Oman’s scores rank toward the middle, while Kuwait’s and Saudi Arabia’s scores are weaker.

Reserve buffers are a key credit support for many GCC sovereigns. However, there is a high degree of opacity in policy making and fiscal buffers compared to global peers, particularly for Kuwait, Qatar and the UAE.