By Tristan Cooper
The Middle East region has long been a scene for political drama. Today’s flashpoints include Iran’s nuclear development, the perennial Arab-Israeli dispute, sectarian tensions in Iraq and tribal conflict in Yemen. Last month, Iran held war games in the Straits of Hormuz.
But what does this mean? To what extent is the sovereign creditworthiness of the oil-rich Gulf Co-operation Council countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – threatened by political risk?
EDITOR’S CHOICE
Gulf states set to spend more on armaments - May-03.Role of sharia boards needs modernisation - Apr-21.Gulf keeps project finance flowing - Apr-14.Comment: Cheap energy addiction must end - Apr-07.Data industry homes in on the Gulf - Mar-31.Comment: Gulf must navigate a bumpy road - Mar-24..A review of history reassures. No government within the GCC has defaulted on foreign currency obligations. The credit strength of GCC governments has sustained a series of regional traumas that include the 1979 Iranian revolution, the Iran-Iraq war of the 1980s and the post-2003 chaos in Iraq. Remarkably, the government of Kuwait continued to service its external debt during the Iraqi invasion and occupation of 1990-91, although it was prevented from making payments on some local currency obligations.
Gulf economies benefit from an inherent hedge. When the political temperature rises, so do oil prices. The years of bumper oil revenues have often coincided with political eruptions. The GCC has also benefited when oil production has been disrupted elsewhere. Saudi Arabia’s oil output soared by 3m barrels per day between 1989 and 1991, while Iraqi supply all but stopped.
To be sure, a sustained disruption of oil exports through the Gulf would be damaging. However, most GCC countries have built up considerable buffers of foreign exchange and offshore financial assets. These protect the balance of payments. Again, take Saudi Arabia as an example. Its central bank held foreign assets worth just over $400bn at the end of 2009, enough to cover the country’s annual imports five times over.
Some GCC countries have alternative oil export routes that bypass the Straits of Hormuz. Oman exports directly via the Indian Ocean, Saudi Arabia’s Yanbu export terminal is located on the Red Sea, and Abu Dhabi is constructing a pipeline that will route oil via Fujairah, which sits outside the Gulf.
The GCC’s domestic politics have also proven resilient. The most serious recent troubles include a spate of militant attacks in Saudi Arabia from 2003 to 2006, sectarian violence in Bahrain during the 1990s, and the 1995 coup in Qatar when the current ruler wrested control from his father. Yet these events did not break the continuity of government.
With the odd exception, the process of political succession in the GCC has proceeded more smoothly than outside observers expected. One recent example is the accession of the current ruler of Kuwait in 2006. Following the death of former Emir Sheikh Jaber, power passed to Sheikh Saad, the crown prince. Due to his ill health, the parliament intervened to replace Sheikh Saad with Sheikh Sabah after 11 days.
This is not to say that the GCC is immune from political risk. Clearly there are scenarios in which the political and economic health of the Gulf states could be threatened. These include an all-out conflict between Iran and the US, and a serious split within a ruling family. Private sectors are more sensitive to political event risk than public sectors.
There is also a range of sensitivity to shocks that is reflected in our current ratings architecture. For example, Bahrain seems to be more vulnerable than other GCC states, given its smaller buffer of foreign assets and its political tensions. The wealthiest Gulf states are more protected by their copious offshore financial resources or, in the case of Saudi Arabia, by its sheer size.
The Gulf region is, relatively, more politically challenged than many others, and we account for this in our sovereign ratings, which are not as high as they might otherwise be. Additional limitations include the volatility of economic output and shortcomings in transparency.
But one should place Gulf political risks in context and evaluate their impact under a range of scenarios, weighing their probability with care. It should be recognised that GCC states have built up considerable protection against political disturbance.
Tristan Cooper is a senior sovereign analyst at the credit rating firm Moody’s Investors Service in Dubai
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