From Libya to Saudi Arabia | FT Alphaville

From Libya to Saudi Arabia

Definitely the strangest sovereign rating action we’ve seen in a while:

Fitch Ratings has downgraded Libya’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB’ from ‘BBB+’ and placed them both on Rating Watch Negative (RWN). The Short-term foreign currency IDR has also been downgraded to ‘F3’ from ‘F2’ and the Country Ceiling has been downgraded to ‘BBB’ from ‘BBB+’…

Lack of a political resolution to the conflict and escalating violence would likely result in a further downgrade. This would especially be the case if disruption extended to Libya’s oil production. Political reforms and/or outright regime change is also unlikely to be smooth, given the absence of a mechanism to guide any transition. However, political reforms which successfully quelled unrest would help stabilise the rating.

Libya’s credit profile balances substantial oil and financial wealth against fragile and idiosyncratic political institutions. Sizeable political risk is already incorporated into the rating. With no formal constitution in place, it has never been made clear how and to whom the Libyan leader – who holds no formal political office – would hand over power. This uncertainty is magnified by the present circumstances. Under the system of revolutionary direct democracy presided over by Mr. Gadhafi, there has been limited space for dissent against the government, as recognised by the World Bank’s governance indicators, which Fitch uses as a benchmark.

Libya is the only Fitch-rated sovereign that has no government debt. Moreover, following several years of high oil prices it has accumulated sovereign assets of up to USD139bn (190% of GDP) at end-2009, split between the foreign exchange reserves of the Central Bank of Libya and the investments of the government’s sovereign wealth fund, the Libyan Investment Authority, created in 2007 and granted legal statute in 2010. The strength of the government’s balance sheet substantially exceeds that of Saudi Arabia (‘AA-‘), where sovereign net foreign assets are 130% of GDP.

There is no constitution, no plan for when Gaddafi goes — but Libya remains investment grade. Meanwhile, if Libya manages to achieve political reforms without escalating violence (in which case good luck, given the regime’s demonstrated willingness to murder hundreds of people) a ratings downgrade may be avoided.

Umm, okay.

For what it’s worth, at pixel time, Al Jazeera was reporting that Libyan jets were bombing protesters and the UK foreign minister said he had seen information to suggest Gaddafi was en route to Venezuela. (Reuters reports that a senior Venezuelan government source quickly denied it.)

It’s good that Fitch mentions Saudi Arabia, though. Despite a figleaf transition process — the Bayah Council — to govern the successions within the Al-Saud ruling family, we’d note these brief points: King Abdullah is 86 years old, and his successors would be vying for the control of the most absolute of Middle Eastern monarchies.

Which, we’d add, are getting rather rare these days.

And as Libya also shows, the more absolute they are, the harder they fall. Just where that leaves the oil market (which has had a very rough Monday, as the chart below shows) — well, we’re not sure.

Related links:
Gaddafi’s rule increasingly fragile – FT
Libya’s crude awakening – FT Tilt