A leading ratings agency downgraded Libya's credit rating Monday as the oil-rich North African country reels from days of violence that have reportedly left hundreds of people dead. Fitch Ratings said its rating on Libya to BBB from BBB+ and warned that another downgrade may be in the offing if there's no clear political resolution or the violence escalates. If it's downgraded another two notches, then Libya's credit rating would be considered junk - surprising for a country with no government debt.
Charles Seville, a director in Fitch's sovereign ratings department, said the downgrade reflects the "eruption of political risk" in the country as protesters try to bring an end to the near 42-year rule of Moammar Gadhafi. Fitch said it's particularly concerned over whether the disruption extends to Libya's oil production. Libya is one of the world's biggest oil producers and has the largest proven oil reserves in the whole of Africa. Three leading oil companies, Eni SpA, Statoil and BP PLC, have already said they are pulling some employees out of Libya or preparing to do so.
The other main concern Fitch identified is that political reforms or outright regime change is unlikely to be smooth, given the absence of a mechanism to guide any transition. Political risk related to the lack of a constitution is already incorporated into Libya's rating, evidenced by the fact that Libya is the only Fitch-rated country that has no government debt. By the end of 2009, it had accumulated sovereign assets of up to $139 billion as it benefited from several years of high oil prices.
In fact, Fitch said the strength of the government's balance sheet substantially exceeds that of Saudi Arabia. Fitch has had a rating on Libya for only a couple of years as part of the country's efforts to open up its economy after it improved its relationship with Western governments. As well as noting the downside risks, Fitch said political reforms which successfully brought an end to the unrest would help stabilize the rating.
