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Sovereign credit ratings in the GCC are in the upper tiers of investment grade and are on a par with most advanced economies. In the region, Qatar, Kuwait and the UAE have the joint-highest ratings from the major ratings agencies, according to analysis from QNB Capital.

Rating agencies utilise a similar approach when assigning a sovereign rating, High in their consideration is the health of public finances, along with fiscal and monetary policy. Rating agencies also take into consideration economic performance and the level of debt (both public and private), including debt servicing capacity.

Investment grade ratings are those that start at BBB (Baa for Moody’s) to AAA, the highest. Ratings at BBB- and below are considered speculative. Ratings provide an indication of a borrower’s ability to make repayments in a timely manner. Therefore, the higher a rating, the lower the interest rate the borrower tends to have to pay to attract lenders.

An outlook is also assigned on the rating indicating possible changes in the next 12-18 months. The sovereign rating set the upper limit of the rating of financial institutions within a country, but is generally one notch down from the sovereign rating.

GCC ratings have been stable in recent months, despite problems with sovereign credit in other regions. Standard and Poor’s (S&P) downgraded the credit rating of the US in August 2011 from AAA to AA+ and in January 2012 it downgraded France from AAA to AA+ as well as lowering the ratings of eight other Eurozone countries. Meanwhile, ratings agencies have continued to affirm sovereign credit ratings in the GCC.

The most recent action on the sovereign rating in the GCC occurred in January 2012, when S&P affirmed Bahrain’s rating.  In September 2011, Qatar’s long-term sovereign credit rating was affirmed at AA for the long term and A1+ for the short term by S&P with a Stable Outlook.

Fitch stated in December last year that its view of sovereign creditworthiness in the GCC had generally remained unchanged, despite regional unrest, and that most sovereign ratings remained on Stable Outlook. Also in December, Abu Dhabi’s credit rating was affirmed by S&P at AA long-term, with a Stable Outlook and A1+ for the short-term.

The region’s high credit ratings are primarily a consequence of its strong macroeconomic fundamentals. Recent robust oil prices have ensured that GCC governments have had strong fiscal surpluses, averaging 9.2% of GDP in 2007-11, and low levels of public debt. Also, the current account surplus of the GCC has averaged 16.8% of GDP in 2007-11 as a result of increased exports earnings.

Surpluses that are not invested domestically accumulate as foreign exchange reserves or are passed on to sovereign wealth funds (SWFs). These funds invest the surpluses internationally to diversify the sources of national income and provide for future generations.

With the GCC’s hydrocarbons reserves expected to last into the long term, these strong fundamentals are likely to remain in place for some time. QNB Capital expects high oil prices to persist in 2012-13, at an average of US$108/b, which will lead to the further expansion of the external net assets positions of GCC governments. This will ease any concerns about external debt levels and mean that sovereign ratings are expected to remain stable at current level for the short to medium term.

Other factors that support sovereign ratings in the GCC include the currency pegs to the US dollar, which make exchange rates relatively stable. The currently moderate level of inflation and growth in the non-hydrocarbons sector, which reduces vulnerability to oil price fluctuations, also support long-term sustainability.

Nonetheless, the region does remain exposed to lower oil and gas prices. Oil prices consistently below US$80 p/b could lead to fiscal constraints in some GCC countries, forcing them to cut back on spending or draw down from their SWFs to maintain expenditure levels in line with existing plans. The Institute of International Finance (IIF) estimates that the budget breakeven oil price in Saudi Arabia and the UAE was just over US$80/b in 2011.

However, oil prices are expected to remain well above the US$80/b level and are therefore unlikely to act as a fiscal constraint in the near future. With sovereign debt issues troubling a number of advanced economies, GCC sovereign ratings are likely to continue to close the gap with their OECD counterparts, according to QNB Capital.

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