In a sign of a further possible downgrade, Turkey this month had the outlook on its rating cut from stable to negative by Standard & Poor’s as concern surrounds the health of its economy. In contrast, the ratings of the GCC – excluding Bahrain – have remained relatively robust, underlining their deep reserves and stable political outlook.
Here, S&P’s John Chambers and Moritz Kraemer explain their lingering worries about the US and the euro zone, why Turkey is in trouble and how the GCC is managing to weather global rockiness.
S&P lowered the US’s AAA sovereign rating in August 2011 to AA plus. What is the latest view on the country?
Mr Chambers: "Right now we are at AA plus with a stable outlook. The fiscal side is getting better. We have some additional fiscal measures taken 12 months ago with the negotiations over the so-called fiscal cliff. But the sort of deep dysfuncationality of Washington persists and you will have seen that in October when the government shut down and there was concern about not raising the debt ceiling in time."
Is the uncertainty about the fiscal situation still the biggest deciding factor in whether you will change the US rating?
Mr Chambers: "We have a stable outlook for the US, which signals the risks to the upside and the risks to the downside are balanced. The constraints on the rating are firstly political and secondly the constraints on the fiscal position. You would need improvements on those fronts. You would need to make sure that timely service of debt is not held hostage to political brinkmanship."
In Europe, you lowered France’s top rating twice in 2012 so it’s rating is now AA. What is your latest view on France?
Mr Kraemer: "The reform agenda, both structural and fiscal, has only been very hesitantly adopted. Without those reforms put forward by the government in principle being following through, we think France's growth potential will be fairly disappointing going forward and that makes it even harder to bring the public debt projectory on a declining trend again. We feel there's unclear policy direction and maybe a limited sense of urgency in making reforms."
Overall, is the euro-zone outlook improving?
Mr Kraemer: "It's stabilising. Right now, most of the ratings are stable. We have one positive outlook, Ireland and three negative outlooks, among them Portugal and Italy, on the periphery. That indicates the decline we've seen over recent years has found some sort of plateau in general. The big risk right now is one of complacency as the worst may be over but we are not yet in a position that resembles the euro zone in 2006 to 2007. GDP is still below pre-crisis levels."
Once considered a hotspot for foreign investors, Turkey’s economy has been spluttering of late. What’s gone wrong?
Mr Kraemer: "Turkey is one of those emerging-market sovereigns most challenged by changing liquidity requirements in international markets because of its large current account deficit and large debt accumulation in the economy and the private sector that has built up over the last few years. The bottom line is that Turkey has yet to establish a track record of being able to grow to provide sufficient job opportunities for its growing population without resorting to external imbalances and debt accumulation."
In contrast to the downgrades in the West, ratings of governments in the GCC have remained more stable in recent years, with the exception of Bahrain. Why is that?
Mr Chambers: "It speaks to a number of the strengths of the GCC: their fiscal and external surplus positions. They've conducted themselves very prudently. They're stable politically, they're stable socially. Kuwait, Qatar and Abu Dhabi are all on AA. Saudi Arabia is on AA minus with positive outlook, Oman is at A and Bahrain at BBB, so they're all investment-grade ratings, as are Ras Al Khaimah and Sharjah. Over recent years the Arabian Gulf has benefited from favourable terms of trade but even with positive trade their stock positions are strong."
What are the downside risks for the GCC?
Mr Kraemer: "One is the structure of the economy. While it is a very prosperous economy, it is a very imbalanced economy, with a big reliance on hydrocarbons despite many years of effort at diversification. The other element is the limited monetary policy. Given the fixed exchange rate there's not much flexibility to conduct independent monetary policy as required by local economic conditions as they keep the peg to the dollar. There's also the question of governance and flexibility of policymaking and the government being handled by just a few individuals. Generally, as the middle class emerges they ask for more participation. While that has not affected the GCC yet, this desire has been growing in other Arabic countries and that's an indication that these are challenges in the longer term the GCC will have to address. Bahrain was a special case and we saw what happened there."
What about the rest of the Middle East and North Africa region?
Mr Kraemer: "Of the others, the only one with an investment grade rating is Morocco, which is BBB minus with a negative outlook. Of the non-GCC countries it probably came out best from the Arab Spring. This is testament to the advanced political institutions and the response of King Mohammed VI. They had a very swift constitutional reform. In Egypt, it's clear that as they're trying to find a new equilibrium for their political situation, the economic situation has deteriorated in tandem. Jordan has been stable in the sense that the regime was not seriously threatened but you had pressures exacerbated by the fact that two of its neighbours, Syria and Iraq, are increasingly unstable and different groups are coming into Jordan."
Mr Chambers: "Lebanon is suffering terribly from dislocations ranging from politics to the refugee problem. The banking system is large and as long as the deposit base is growing that can provide financing for the government deficit which remains high."
Mr Chambers is the managing director at S&P and the chairman of the group’s sovereign-rating committee. Mr Kraemer is the managing director and the chief rating officer at S&P, heading sovereign ratings for Europe, Middle East and Africa.
tarnold@thenational.ae
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