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MENA Sovereign Rating Trends Mid-Year 2016

July 2016

July 14, 2016 | 15:45| Dubai

Overall sovereign creditworthiness in the Middle East and North Africa (MENA) region has continued to deteriorate in 2016. This is according to a report published today titled Middle East And North Africa Sovereign Rating Trends Mid-Year 2016, on RatingsDirect. Here are highlights:

The report covers the 13 sovereigns we rate in the region: Abu Dhabi, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Ras Al Khaimah, Saudi Arabia, and Sharjah. “We rate eight MENA sovereigns in the ‘BBB’ rating category or above,” S&P Global Ratings sovereign credit analyst Benjamin Young said.

“The average MENA sovereign rating is now close to ‘BBB’, one notch lower than in mid-2015. When weighted by GDP, the average moves closer to ‘BBB+’. This average, weighted by nominal GDP, has fallen more sharply than the unweighted average over the past 12 months mainly because we have lowered the rating on the region’s largest economy, Saudi Arabia. While the ratings on the regional net hydrocarbon importers–Jordan, Egypt, Morocco, Lebanon, Ras Al Khaimah, and Sharjah–have remained unchanged, we have revised the outlook on Jordan and Egypt to negative. Our ratings on Lebanon also have a negative outlook.”

Given the uniformly high dependence among GCC sovereigns on receipts from hydrocarbon exports, the consequences of a sharp fall in prices are clearly visible in both fiscal and external data. While the resulting imbalances differ in scale and duration, one commonality among GCC sovereigns is the emergence of almost unprecedented fiscal financing needs. In Bahrain, Oman, and Saudi Arabia we expect fiscal deficits to average 12% of GDP per year in 2016 and 2017. Although much lower, fiscal deficits for Abu Dhabi and Qatar are nonetheless above 5% of their GDPs.

International market volatility–reflecting weaker demand from China, uncertainty stemming from Brexit, and the potential for a change in stance from key monetary authorities on global liquidity–could deter issuers from Eurobond placements for some time. Further, deposit growth in GCC domestic banking systems has slowed dramatically from double-digit growth over 2012-2014; hydrocarbon-related public-sector entities are the main depositors. Balance sheet strength remains a characteristic of the region, however. Only Bahrain is in a fiscal net debt position, for example. That said, funding deficits with assets alone–if this were possible–would have a marked impact on this strength. Currently, we expect Bahrain’s net debt position to increase almost six-fold between 2014 and 2019, Oman’s net asset position to decline by almost 90% and Saudi Arabia’s by 35% over the same period.

Exhibit 1

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