JEDDAH: Moody’s says in a new report that GCC countries' institutional strength will determine their ability to push through economic and fiscal reforms designed to counter the drop in oil revenue.
"Low oil prices are testing even strong institutions," says Mathias Angonin, a Moody's analyst and author of the report. Moody's assessment of institutional strength incorporates policy effectiveness, governance indicators, and transparency.
The report also notes that Moody's recent review of the ratings of GCC countries considered each sovereign's capacity to formulate and implement effective policy responses to the lower oil prices. The review concluded with a downgrade of three GCC sovereign ratings, and a negative outlook assigned to four ratings that were confirmed.
Sovereigns have implemented several fiscal measures to adjust to lower revenues. The introduction of a GCC-wide value-added tax (VAT) of 5 percent from 2018 will support revenue diversification, while governments are also considering increases in corporate income taxes and taxes on remittances.
The reforms, while positive, will only partly compensate for the continued oil price slump. As such, Moody's expects that fiscal and external constraints will persist beyond 2016.
Moreover, the social impact of fiscal reforms will make policy implementation tougher for Bahrain (Ba2 negative), Oman (Baa1 stable) and Saudi Arabia (A1 stable), where governments are under pressure to continue redistributing oil revenues to their populations to avoid economic-related civil unrest.
In comparison, Kuwait (Aa2 negative), Qatar (Aa2 negative) and the UAE (Aa2 negative) have fewer such constraints.
Relative to globally rated sovereigns, Qatar and the UAE have high institutional strength scores.
"Low oil prices are testing even strong institutions," says Mathias Angonin, a Moody's analyst and author of the report. Moody's assessment of institutional strength incorporates policy effectiveness, governance indicators, and transparency.
The report also notes that Moody's recent review of the ratings of GCC countries considered each sovereign's capacity to formulate and implement effective policy responses to the lower oil prices. The review concluded with a downgrade of three GCC sovereign ratings, and a negative outlook assigned to four ratings that were confirmed.
Sovereigns have implemented several fiscal measures to adjust to lower revenues. The introduction of a GCC-wide value-added tax (VAT) of 5 percent from 2018 will support revenue diversification, while governments are also considering increases in corporate income taxes and taxes on remittances.
The reforms, while positive, will only partly compensate for the continued oil price slump. As such, Moody's expects that fiscal and external constraints will persist beyond 2016.
Moreover, the social impact of fiscal reforms will make policy implementation tougher for Bahrain (Ba2 negative), Oman (Baa1 stable) and Saudi Arabia (A1 stable), where governments are under pressure to continue redistributing oil revenues to their populations to avoid economic-related civil unrest.
In comparison, Kuwait (Aa2 negative), Qatar (Aa2 negative) and the UAE (Aa2 negative) have fewer such constraints.
Relative to globally rated sovereigns, Qatar and the UAE have high institutional strength scores.
