Government Related Issuers in the Middle East tend to have higher levels of support than in other regions

The average level of government support assessed for these issuers is 94% (with a range between 80% and 100%). This is considerably higher than the average level of support for the 372 GRIs so far rated globally, of 78%. While the sample size of rated GRIs in the Middle East is still relatively small, this trend is likely to continue given the paternalistic and interventionist tendencies of most
governments in the Middle East region, particularly the Gulf states.

Countries in the Middle East tend to have large public sectors that extend into many areas of the economy and employ a significant portion of the workforce. There are clearly variations in the size of government between countries
but as an extreme example, over 90% of the national workforce in Kuwait is reported to work for the public sector. The reasons for this are multiple. A volatile regional political environment has encouraged strong governments that can maintain security amid ethnic and religious divisions. The historical practice of rule through local elites prompted the establishment of centralized monarchies in several countries after their independence. The "rentier" structure of oil-exporting economies, whereby the primary source of production (oil and gas) is controlled by the state, has inflated their public sectors. Likewise, the adoption of socialist economic policies by some left-leaning governments during the Cold War caused a massive expansion of the public sphere which has yet to be undone.

The large size and strong role of the public sector in most Middle Eastern countries has fostered a culture and expectation of state intervention as well as a blurring of the line between the public and private sectors. The tendency of governments to support their citizens and often to act as an employer of first and last resort is apparent in the large
size of the public sector wage bill. According to IMF data, in 2005 the central government's wage bill alone exceeded 10% of GDP in Bahrain, Saudi Arabia, Morocco, and Tunisia. Government subsidies of basic commodities and services such as bread, housing, fuel, water and electricity are common throughout the region. There is also a long history of state support for loss-making public companies in certain countries. In Egypt, for example, privatization of the banking sector has been complicated by a high level of non-performing loans accumulated through previous directed lending to poorly performing state-owned enterprises.

Governments in the region tend to be highly conscious of the potential reputational cost of allowing a stateowned company to default because of the close association between them. In the Gulf states, for example, the stateowned oil and gas companies dominate their sectors and are virtually inseparable from the governments themselves, their boards populated by senior ministers or high-ranking members of ruling families. Such companies are often championed as flagships, protected from foreign competition and used as vehicles for the implementation of public policy. In Dubai, for instance, the ruler's vision for developing the emirate into a world class services hub is primarily being realized through the activities of the state-owned entities Dubai World, Dubai Holding, and Emaar Properties.

GRIs in the region also tend to be larger than those in other regions relative to the size of their economies and can employ considerable numbers of citizens, thereby increasing the political cost of layoffs potentially resulting from a financial failure. Given that labour markets for nationals tend to be inflexible in the Middle East, the degree of public tolerance for job losses is particularly low. Finally, there are very few legal or administrative barriers to state aid in the Middle East outside of countries' obligations under international agreements such as the WTO. We do not know of a single case of state aid to a government-owned entity being challenged by the courts.

For these reasons, it is likely that GRIs in the Middle East will, on average, continue to receive relatively high assessments of support compared with other regions although the specific level of support for any GRI will continue to depend on its importance to the government and the wider economy. GRIs receiving the highest levels of support will tend to be those with majority government ownership that are most closely associated with the government's economic strategy and the fundamental factors of production. For example, we have so far assigned the highest levels of support to GRIs in the Gulf that are flagship, state-owned companies involved in the export of hydrocarbons (oil, gas, and petrochemicals). Other GRIs that would be likely to attract a very high level of support in the region would be flagship companies involved in strategically important sectors such as power, water, railroads, airlines or defense.

The level of support assigned to GRIs in the Middle East region is also, in general, likely to be more robust, i.e. less likely to fall, than in other regions given that the factors driving a high assessment of support tend to be deeply embedded in the structure of these societies and economies. For this reason, the pace of economic liberalization in the
Middle East remains slower than in other emerging markets. Even the most common cause for a reduction in the assessed level of support, privatization, may not be viewed in quite the same way as in other countries. For instance, several governments in the Gulf have accelerated privatization over the past few years. However, this policy has been motivated less by a desire to liquidate assets or to reduce the scope of the public sector, and more by the opportunity it
presents to redistribute wealth to the general population at a time of high oil prices and wide fiscal surpluses. Hence, in these cases, privatization does not necessarily result in a lower level of government support given governments' concern to protect the value of equity distributed to citizens.

Furthermore, the Middle East has many examples of companies that are not directly owned by the government, though majority held by quasi-government bodies. In these instances Moody's will continue to attempt to look through such structures, thus taking a view on whether or not the company in question is essentially state-controlled. While according to Moody's definitions this may rule out the company's ability to formally qualify as a GRI, Moody's
may still apply joint default analysis to capture any systemic and/or institutional support into its final ratings of such
entities.