Gulf Arabs Face Mixed Blessing From an Iran Accord: Arab Credit

A nuclear deal between Iran and countries including the U.S. and Russia could prompt sovereign upgrades of Persian Gulf Arab nations even as it may cut their revenue by causing oil prices to fall, according to IHS Inc.

“The reduction in geopolitical risk would serve as a key trigger for a sovereign ratings review for the countries of the Gulf Cooperation Council, and potentially an upgrade,” Bryan Plamondon, an economist specializing in the Middle East at energy consultant IHS, said yesterday by e-mail from Lexington, Massachusetts. “Countries would then likely see benefits in the form of lower borrowing costs and greater foreign investment.”

Talks between Iran and the so-called P5+1 group of world powers resumed yesterday at diplomats level in Geneva. “Differences that remain between the parties are narrow, and I believe they can be bridged with political will and commitment,” U.K. Foreign Secretary William Hague said in London. Concern that Iran seeks to make an atomic bomb and the civil war in Syria, where Iran supports President Bashar al-Assad, have helped boost crude prices to more than $115 a barrel twice in the past 12 months.

The cost of insuring Qatari debt against default is 67 basis points, or 0.67 of a percentage point, compared with 13 basis points for Norway, Europe’s biggest natural gas supplier, according to data compiled by Bloomberg. Qatar is the largest exporter of liquefied natural gas, which sells at prices linked to oil. Norway also pays 40 percent less than the United Arab Emirates sheikhdom of Dubai to borrow for 10 years, data show.

Qatar’s Target

Middle Eastern political risk weighs on GCC credit ratings. All six nations of the regional group are ranked as investment grade at Moody’s Investors Service and Standard & Poor’s. The agencies respectively rate Kuwait, Qatar and the U.A.E. as Aa2 or AA, Saudi Arabia as Aa3 and AA-, Oman as A1 and A, and Bahrain as Baa2 and BBB. Qatar seeks to raise its S&P rating by two levels to AAA, putting it on par with countries including Canada and Norway, Finance Minister Yousef Kamal said in March.

Iran’s government says its program to enrich uranium is intended for electricity generation and other peaceful purposes. The U.S. and the European Union dispute the claim and have imposed economic sanctions on the Islamic Republic to try to halt its nuclear progress. The EU stopped buying Iranian crude as of July 2012, and Iran has made sporadic threats to shut the Strait of Hormuz, a transit point for one fifth of the world’s seaborne oil and all of Qatar’s LNG.

Ranking Lowered

Iran was the second-largest producer in the Organization of Petroleum Exporting Countries until last year, then tumbled to sixth place as sanctions toughened. The country pumped 2.6 million barrels daily in October, data compiled by Bloomberg show.

Emad Mostaque, a London-based strategist at Noah Capital Markets, said oil prices could drop by $15 a barrel should a diplomatic settlement remove the risk of conflict and allow Iran to maximize its crude exports by as much as 2 million barrels a day. Iran’s neighbors in the GCC supplied 20.9 million barrels on average in 2012, or about 24 percent of the world’s oil last year, according to data from BP Plc.

“The major Gulf states have minimal debt and huge cash positions, so it’s unlikely any nuclear agreement will cause significant tightening” of their public finances, he said in a Nov. 17 e-mail.

Saudi Arabia, the U.A.E. and Kuwait would “certainly” be able to handle a decline in oil prices if a settlement with Iran leads to greater flows of Iranian crude to market “or, at a minimum, a reduction in the risk premium associated with Iran,” said Plamondon of IHS.

Historic Chat

Hassan Rouhani, the new Iranian president, and U.K. Prime Minister David Cameron agreed in a Nov. 18 phone call -- the first such direct contact between their governments in more than a decade -- to make the most of the latest round of talks, according to a statement from the U.K. prime minister’s office.

OPEC may need to curb output next year amid increasing crude supply from producers outside the group such as the U.S. and Kazakhstan, Citigroup Inc. said in a report earlier this week. The group has kept its output target at 30 million barrels a day since 2011 and will meet on Dec. 4 to reassess the limit.

With Qatar planning to spend $200 billion on infrastructure in preparation for playing host to the soccer World Cup in 2022, an upgraded credit rating would save it billions of dollars and offset any drop in revenue from energy exports, Plamondon said.

Dubai Trade

The U.A.E. would benefit from renewed trade with Iran. Dubai’s commerce with Iran fell 31 percent in 2012 and 12 percent in the first half of this year, he said.

Qatar “shares with the other GCC member states a moderate degree of geopolitical event risk arising from regional and global tensions vis-a-vis Iran,” Moody’s said earlier in the week. The agency on Nov. 14 confirmed Saudi Arabia’s Aa3 rating, which, it said, incorporated “an element of geopolitical risk because of its strategic rivalry with Iran.”

Prices for Brent crude, a benchmark for more than half of the world’s oil, would have to slip below $80 a barrel before Qatar and Saudi Arabia post financial deficits, S&P said on Nov. 18. OPEC’s collective “basket” price averaged $104.58 a barrel yesterday, while Brent was at $108.41 at 12:51 p.m. today in London.

“Reduced tension and a rise in Iranian oil sales will mean a lower price, but the trade and budget balances of countries like the U.A.E. are quite strong,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi PJSC, said in an e-mail on Nov. 17. “If these come down a bit, there won’t be a rating impact.”

Before it's here, it's on the Bloomberg Terminal.