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Political risks weigh on Mena ratings: S&P

Dubai, May 7, 2012

Standard & Poor's Ratings Services, which rates 13 sovereigns in the Middle East and North Africa (Mena) region, said five countries in the region have negative outlooks, indicating at least a one-in-three chance that it could lower the sovereign ratings in the next one to two years.

For all five - Bahrain, Egypt, Jordan, Oman, and Tunisia - the negative outlook reflects the agency's view that it could lower the ratings if political tensions were to escalate and further weaken economic prospects or external and fiscal performance, the agency said.

The ratings on Abu Dhabi, Kuwait, Lebanon, Morocco, Qatar, Ras Al Khaimah, Saudi Arabia and Israel have stable outlooks, indicating that the agency currently does not expect to raise or lower the ratings over the 2012-2013 ratings horizon, it said.

The report includes individual sections on the rated sovereigns, and looks at the considerable divergence between the creditworthiness of those Mena sovereigns with a substantial hydrocarbon endowment and those without.

Standard & Poor's said all the states have similarly high political risks and limited monetary policy flexibility that constrain the sovereign credit ratings.

'The nature of political risk differs across the region, and includes domestic political turmoil and succession and geopolitical risk. Institutional transparency and accountability are a further consideration in our assessment of political risk. The limits to monetary policy flexibility in the region stem from fixed or heavily managed exchange rates, compounded by small and underdeveloped capital markets,' the agency said.

For many countries, however, these constraints are more than offset by their substantial hydrocarbon endowments. For the most part, these result in strong external net creditor positions; government net asset positions supported by prudent fiscal policies; and wealthy, but rather undiversified economies.

On average, Mena sovereign ratings deteriorated following the wave of popular uprisings that began in early 2011. 'We lowered our foreign currency sovereign credit ratings on Bahrain, Egypt, and Tunisia to reflect our view of their heightened domestic political risks and the knock-on effect on their economic, external, fiscal, and monetary risks,' the agency said.

The average Mena sovereign rating is in the investment-grade category, close to 'BBB+'.  When weighted by GDP the average rating is closer to 'A'. However, when considering these averages the standard deviation should be taken into account. This indicates that the spread of sovereign ratings within the region across Standard & Poor's ratings scale has always been relatively wide and has become greater over time, it said.

The average rating for those with a hydrocarbon endowment is currently close to 'A+', while for those without it is close to speculative grade. This divergence in ratings between the two groups has widened further following the onset of the
Arab Spring.

The agency sees considerable divergence between the creditworthiness of those Mena sovereigns with a substantial hydrocarbon endowment and those without. This is because those with a material endowment relative to the size of their economies have significant advantages under our criteria as their sovereign credit worthiness is supported by:

· The high income generation of this sector, which supports the assessment of economic risk;
· The ability of these sovereigns to generate receipts from abroad necessary to meet their public- and private-sector
obligations to nonresidents, which supports their external profile. All are strong net external creditors; and
· The strong and sustained inflows to government revenues from the sector, which mostly results in strong general
government surpluses, low government financing needs, net asset positions and, in some cases, exceptional fiscal
buffers against economic or financial shocks.

The agency classifies the Mena sovereigns with a substantial hydrocarbon sector endowment as those with net oil exports as a percentage of their population above 5 per cent in 2011. This includes Abu Dhabi (with about 95 per cent of the UAE's oil reserves), Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia. Most have foreign currency ratings in the 'AA' category (The exceptions are Oman and Bahrain, which are rated in the 'A' and 'BBB' categories, respectively).

The rated MENA sovereigns that do not have a substantial hydrocarbon sector are Egypt, Israel, Jordan, Lebanon, Morocco, Ras al Khaimah, and Tunisia.

'We believe the issues of increased representation, a more even distribution of wealth, and radical changes to political systems could drag on for many years to come. The risk is that internal conflict becomes the norm, while government efforts to improve the macroeconomic policy environment take a back seat. We could lower ratings over the outlook period if popular demands for change were to result in an escalation of domestic political turmoil and weakened economic growth prospects and/or fiscal and
external balances,' the agency said.

'We view Bahrain and Egypt's political situation as more fraught than most in the region. We believe Bahrain's severe domestic political turmoil is damaging its economic model,' it said.

'In Egypt, the ousting of President Hosni Mubarak has heralded ongoing domestic conflict and protracted political transition. In our view, any new government in Egypt is unlikely to have the political will or mandate for substantial reforms such as reducing government subsidies or improving the economy's structure,' the report added.

In Morocco, Jordan, and Tunisia, policy responses could become less predictable should the domestic political situation deteriorate further. 'We also see heightened potential for policy choices--made under public pressure--to weaken support for sustainable public finances and balanced economic growth. We believe that given these countries' pressing social needs, any incoming government is unlikely to prioritise measures such as reforms to subsidies--which would enhance growth while putting the public finances on a more sustainable footing,' it said. - TradeArabia News Service




Tags: Bahrain | S&P | Ratings | negative outlook |

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