Gulf’s strongest performers tipped for rating upgrade

Matthew Turner
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Qatar and Kuwait edge closer into ECR’s tier one; Oman and UAE overtake Saudi Arabia.

All of the Gulf states, with the exception of Bahrain, saw an improvement in their overall risk assessment since March 2012, suggesting the region’s strongest performers might now be tipped for a rating upgrade.


Qatar, with a global rank of 18, sits only four places away from ECR’s tier one and remains the region’s prime candidate for an AAA credit rating, due to rapid economic growth and fortress-like public finances.

With an economic assessment score of 79.7, Qatar boasts the third-strongest economic fundamentals worldwide, according to ECR analysts. Real GDP growth averaged 18% between 2006 and 2011, according to the IMF, while the government posted a surplus of 7% of GDP. 

Analysts participating in the ECR survey assigned Qatar with the highest economic-outlook score globally and the fourth-highest government finances score worldwide, in Q1-2013, raising the spectre of a top-grade rating.

Qatar’s strong performance in the ECR global rankings resulted in the sovereign overtaking the UK in September 2012, before Moody’s decision to strip the UK of its AAA credit rating in January. 


Similarly, Kuwait should be on track for a top-grade rating, if the government manages to build on economic momentum and instil political stability.

Kuwait’s overall risk assessment score improved by 4.6 points to 71.9 year on year, pushing its global rank upward by seven places to 22, and leaving it seven places short of ECR’s tier one.

Again, Kuwait’s position was bolstered by an impressive economic assessment, which increased by 0.5 points to 74.7 points in Q1 2013, with improvements in the country’s bank stability and public finances indicators.

Additionally, Kuwait benefits from a high score in the survey’s access to capital markets indicator, which increased by 0.5 points to 8.3 in Q1-2013.

Saudi Arabia

Prospects of Saudi Arabia receiving an AAA rating are fading, according to the latest quarterly survey results. Its position in the rankings dipped one place to 29th globally, allowing the UAE and Oman to overtake the sovereign.

Saudi Arabia’s fall in the rankings reflects the moderate-high political risks associated with its risk profile.

It received the lowest political assessment by participating economists in Q1 2013. Institutional risk (4.2) and transparency issues (4.2) remain the country’s prime rating constraints, according to ECR data.

A report by Moody’s identifies Saudi Arabia’s participation in the IMF’s general data dissemination system as a sign of progress in improving transparency issues, “although data availability lags considerably that of other highly rated countries globally”, notes the report.

Among other rating constraints, Fitch identifies a serious deterioration of security conditions in neighbouring Bahrain and Yemen, and the uncertain course of events in Syria, which also poses risks which could impact on the rating.

“In the event of long-lasting damage to oil export infrastructure, a downgrade could be triggered,” notes Fitch.

However, Saudi Arabia’s risk ranking remains elevated by strong economic fundamentals, in line with the Gulf. With an economic assessment of 68.1, the sovereign outperforms many of the disputed AAA sovereigns, namely the US and the UK.

However, it looks like it will be sometime yet before Saudi Arabia can persuade analysts it is worthy of an AAA credit rating.

Rating rationale

Why then have the Gulf states been deprived of an AAA credit rating?

According to one of ECR’s expert contributors, Luc Marchand, there are two reasons why the Gulf states have been deprived of a top credit rating. “The first constraint is geopolitical, and the second is the inefficiency of some state and market institutions,” he says.

“There have been some remarkable developments in the country’s market and financial institutions, but we would like to see a financial umbrella under the Qatar financial services centre, to standardize competition for both local and international banks.

“The threats from the Arab Spring and other regional challenges means they have to continue strengthening their own domestic political and financial system all of the time.”

And it appears ECR contributors remain concerned about the Gulf’s political assessment deficit. Three contending AAA Gulf states, Qatar, Kuwait and Saudi Arabia, fall below the average AAA political assessment scores (see chart below).

“Triple A means you have zero chance of default, not 0.01%, which makes the difference between the Gulf states rating and a triple-A rating,” says Marchand. 

And as a report by Capital Economics noted last month, Qatar is not immune to the downturn in the global economy, which would negatively affect the country’s public finances, if this occurred in tandem with a global price oil shock. 

“The bigger risk, however, comes from the possibility of a much sharper downturn in the world economy and, in particular, a sustained drop in energy prices,” states Capital Economics. 

“This would hurt the government’s fiscal position – about two-thirds of total revenues come from the hydrocarbon sector – and if oil prices fell below $55 per barrel, then the government would even run a budget deficit. 

“Ultimately, this could result in the authorities needing to rein in spending, thus curtailing growth.”

This article was originally published in Euromoney Country Risk.