Average MENA sovereign rating is now close to BBB, one notch lower than in mid-2015

GCC sovereigns are facing an unprecedented level of fiscal financing needs in the wake of a sharp plunge in oil revenues, Standard and Poor’s said.

In a report entitled “Middle East And North Africa Sovereign Rating Trends Mid-Year 2016” on RatingsDirect, the agency said overall sovereign creditworthiness in the Middle East and North Africa region has continued to deteriorate in 2016.

“While the resulting imbalances differ in scale and duration, one commonality among GCC sovereigns is the emergence of almost unprecedented fiscal financing needs,” it said.

The report covers the 13 sovereigns S&P rates in the region: Abu Dhabi, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Ras Al Khaimah, Saudi Arabia and Sharjah. “We rate eight Mena sovereigns in the BBB rating category or above,” S&P Global Ratings sovereign credit analyst Benjamin Young said.

“The average Mena sovereign rating is now close to BBB, one notch lower than in mid-2015. When weighted by GDP, the average moves closer to BBB+.”

This average, weighted by nominal GDP, has fallen more sharply than the unweighted average over the past 12 months mainly because we have lowered the rating on the region’s largest economy, Saudi Arabia, S&P said.

“Given the uniformly-high dependence among GCC sovereigns on receipts from hydrocarbon exports, the consequences of a sharp fall in prices are clearly visible in both fiscal and external data,” the report said.

In Bahrain, Oman and Saudi Arabia, S&P expects fiscal deficits to average 12 per cent of GDP per year in 2016 and 2017. Fiscal deficits for Abu Dhabi and Qatar are much lower at above five per cent of their GDPs.

S&P noted that deposit growth in GCC domestic banking systems has slowed dramatically from double-digit growth over 2012-14; hydrocarbon-related public-sector entities are the main depositors. “Balance sheet strength remains a characteristic of the region, however. Only Bahrain is in a fiscal net debt position, for example.”

The ratings agency expects Bahrain’s net debt position to increase almost six-fold between 2014 and 2019, Oman’s net asset position to decline by almost 90 per cent and Saudi Arabia’s by 35 per cent over the same period.

The 13 Mena sovereigns will borrow an equivalent of $134 billion from long-term commercial sources in 2016 compared with $143 billion borrowed in 2015, which was more than double the $68 billion that S&P expected would be borrowed in that year. S&P expects Egypt, Saudi Arabia and Iraq to be the biggest issuers in 2016, and said absolute debt levels in Mena are likely to increase by $15 billion by year-end 2016, to reach $667 billion in nominal terms.

It noted in an earlier report that the sizeable fiscal assets accumulated by Abu Dhabi, Kuwait, Qatar, and Saudi Arabia provide them with the option to either issue debt or liquidate some of these assets.

“Based on our assumptions, we now expect a rise in GCC sovereign gross commercial long-term borrowing to $45 billion in 2016, up from $40 billion in 2015 and $4 billion in 2014.”

According to S&P’s estimates, Saudi Arabia borrowed $26 billion in 2015.

– issacjohn@khaleejtimes.com