Fresh cuts in the debt ratings of Bahrain and Oman underline a growing gap between the weakest Gulf Arab economies and the others - a gap which may not yet be fully reflected in market prices. Moody's downgraded Bahrain by two notches on Friday to B1, four notches below investment grade. All three major agencies rate Bahrain junk; Moody's is one notch below Standard & Poor's and three below Fitch.
Moody's also cut Oman one notch to Baa2, two notches above S&P, which has the country at junk, and the same level as Fitch. All three agencies kept negative outlooks for Bahrain and Oman. That is a big contrast to the other Gulf Arab oil exporters, which are in investment grade territory and mostly have stable outlooks. All three agencies see Saudi Arabia as stable.
The International Monetary Fund has warned both countries they need to do more to cut state budget deficits - beyond already announced plans - to stay solvent. London-based Capital Economics called the two "the Gulf's weak spots". "Bahrain and Oman were the least well-prepared of the Gulf economies to confront a prolonged period of low oil prices," Capital said in a report last month.
But by some measures, bond prices are still not reflecting that outlook. The spread of Bahrain's bonds due January 2021 over Saudi Arabia's October 2021 bonds has narrowed since end-2016, to 177 basis points from 186 bps, even as the gap between their ratings has grown. The spread of Oman's June 2021 bonds over the Saudi bonds has widened only slightly, to 88 bps from 67 bps. Bahraini and Omani debt can also seem richly valued against some similarly rated bonds outside the region. Bahrain's 2021 notes are yielding 4.52 percent, inside the 4.60 percent for the January 2021 bonds of another embattled oil exporter that Moody's rates B1, Nigeria - even though Moody's has a stable outlook for Nigeria. Both Bahrain and Oman are running double-digit state budget deficits as percentages of gross domestic product, and both have much smaller fiscal reserves than their neighbours - in the tens of billions of dollars rather than hundreds.
The other oil exporters in the Gulf with large deficits have presented convincing plans to cut their deficits enough to avoid disaster; last December, Saudi Arabia released a detailed plan to slash its deficit to zero by 2020. Bahrain and Oman have not been as convincing. Partly because of parliamentary opposition to austerity, Bahrain projects a 2017 deficit of 1.3 billion dinars ($3.4 billion) and 1.2 billion dinars next year, little changed from 1.5 billion dinars in 2016.
Oman has imposed austerity more aggressively but stubbornly low oil prices are making it miss its targets. The government posted a deficit of 2.04 billion rials ($5.3 billion) in the first five months of 2017, while its budget plan projects a full-year deficit of 3.0 billion riyals.
Bahrain has nine years of hydrocarbon production left at current levels based on known reserves, and Oman under 20, S&P has estimated. Saudi Arabia has about 60 years left and the other wealthy Gulf oil exporters have more, the study showed. So far, Bahraini and Omani bonds have been supported by the prospect the countries would receive aid from neighbours in any crisis. Bahrain is a close ally of Riyadh and while Oman is not so close, investors assume neighbours would want to avoid any financial disaster in the region.
Rating agencies are starting to question whether such aid would definitely be enough to avoid default, however. "While Moody's would expect support from neighbouring countries in times of crisis - predominantly from Saudi Arabia - there is no clarity about the form and timeliness of this support in the event that external funding dries up," Moody's said of Bahrain.
Comments
Comments are closed.