Wednesday 24 / April / 2024
Muscat: S&P Global Ratings has not changed its ratings or outlooks on Gulf-region issuers thus far mainly because it does not expect direct military conflict between the US and Iran or their regional allies.
The rating agency expects the Strait of Hormuz to remain open and its ratings on Gulf sovereigns already takes into account the region's current geopolitical volatility.
"Although our base case is that there will be no direct military conflict between Iran and the US, we've considered two potential stress scenarios," S&P said.
Under scenario 1, S&P envisions credible threats to block the Strait or even a blockage put in place for a few days. As in the past, when closure threats were made by Iran, the rating agency believes that international pressure would quickly be brought to bear or, alternatively, there might be a military skirmish. Either way, due to the Strait's international significance, S&P expects the threats to subside and any blockage to be resolved relatively quickly.
Under scenario 2, the rating agency envisions the Strait of Hormuz being closed for an extended period. The rating impact in scenario 2 would likely be more pronounced than in scenario 1, S&P said in its report.
Both scenarios could weigh on the creditworthiness of Gulf Cooperation Council (GCC) sovereigns and have consequences for Gulf-based entities, possibly banks and some nonfinancial companies.
"The main ways in which the scenarios might affect the Gulf sovereign ratings include via an increase in sovereigns' funding costs, disruption to foreign direct investment (FDI) flows and equity investments, expat and other population movements, and bank deposit outflows," S&P said.
"This could damage economic growth prospects and harm governments' fiscal positions if assets were deployed to offset these negative effects, including for foreign exchange support. Prolonged tensions would likely make global oil prices more volatile and could weaken global economic growth," the rating agency added.
Under either scenario, an increase in oil prices could offset some of the impact of capital outflows and weaker economic growth. However, in scenario 2, Gulf sovereigns would be unlikely to benefit much from higher oil prices if the Strait were blocked, S&P said.
The rating agency further said that under either scenario, some GCC countries would likely be more affected than others. Certain sovereigns--Abu Dhabi, Kuwait, Qatar, and Saudi Arabia--would likely be better cushioned by their large stock of government external assets.
Additionally, Abu Dhabi and Saudi Arabia have alternative export channels that could partly alleviate the impact of a blockage of the Strait on their economies. Abu Dhabi's pipeline system can bypass the Strait and deliver up to 1.6 million barrels of oil per day (about 50 per cent of production) directly to a terminal on the Indian Ocean. Saudi Arabia's pipeline system can pump 5 million barrels per day, also about 50 per cent of its daily oil production, from its Eastern Province to a Red Sea port.
Bahrain appears to be the most vulnerable Gulf sovereign to the consequences of the scenarios. Bahrain's fiscal position is weak and its economy has by far the highest gross external financing needs, totaling more than 300 per cent of current account receipts (CARs) plus usable reserves, reflecting its large banking system. Oman is, we believe, less likely to be directly affected by military action owing to its geographic location and neutral foreign policy, S&P said in its report.
How might the loss of expat deposits affect the banking system?
Deposit outflows from expatriate populations can be unpredictable. There are no official statistics on the proportion of expatriate deposits in the GCC banking system's deposit bases. However, given the structure of the populations, we understand that the contribution is not negligible. If heightened geopolitical risks were to lead expats to return to their home countries, we think a portion of their deposits could go with them.
Such a situation could pose substantial liquidity risks for the banking systems in the United Arab Emirates (UAE), Qatar, and Bahrain. For example, we estimate that retail deposits (from locals and expatriates) in the UAE and Qatar account for around one-quarter of their respective banking systems' total deposits.
