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S&P publishes MENA Rating Trends 2016

Nine of the 13 MENA sovereigns we rate are investment grade. Egypt, Iraq, Jordan, and Lebanon are speculative grade

Standard & Poor’s Ratings Services said that overall sovereign creditworthiness in the Middle East and North African (MENA) region has deteriorated since Standard & Poor’s last published six months ago.

We rate nine of the 13 MENA sovereigns in the ‘BBB’ rating category or above. The average MENA sovereign rating is now close to ‘BBB’. 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 six months because we have lowered the rating on the region’s largest economy, Saudi Arabia,” said Standard & Poor’s sovereign analyst Trevor Cullinan, in the report published today, “Middle East And North Africa Sovereign Rating Trends 2016.”

“During that time, we also assigned ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings to The Republic of Iraq, which has a relatively large economic weight compared with other MENA sovereigns.”

“These averages mask a clear difference between those sovereigns with a significant hydrocarbon endowment and those without,” Mr. Cullinan added.

The average rating for the hydrocarbon-endowed sovereigns of Abu Dhabi, Bahrain , Iraq, Kuwait, Oman, Qatar, and Saudi Arabia, is currently close to ‘A’, having been at ‘A+’ prior to the downgrade of Saudi Arabia and the inclusion of Iraq in the average. For those with more limited hydrocarbon resources (Egypt, Jordan, Lebanon, Morocco, Ras Al Khaimah, and Sharjah), it is closer to ‘BB+’.

In October 2015 we downgraded Saudi Arabia’s ratings to ‘A+’ from ‘AA-‘ due to the deterioration in the Kingdom’s fiscal position. Saudi Arabia’s general government fiscal deficit widened to about 15% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. Absent a rebound in oil prices, we now expect general government deficits of 10% of GDP in 2016, 8% in 2017, and 5% in 2018, based on planned fiscal consolidation measures.

In November 2015 we also lowered our ratings on Oman to ‘BBB+’ from ‘A-‘. The downgrade resulted from our expectation that a period of sustained low oil prices will impair the country’s fiscal and external balances. We also believe that Oman’s trend growth in real per capita GDP will remain materially below that of peers.

Of the 13 MENA sovereigns we rate, nine currently have a stable outlook despite the challenging political and economic backdrop. Four, Bahrain, Lebanon, Oman and Saudi Arabia, have negative outlooks.

We have negative outlooks on Bahrain and Saudi Arabia, reflecting weakening fiscal profiles and uncertain policy responses.

At the time of the November 2015 downgrade of Oman’s ratings, we also assigned a negative outlook, reflecting our view that the government’s fiscal and external positions could deteriorate beyond our current expectations over the next two years.

We revised the outlook for Lebanon to negative in September 2015, stemming from our view that political uncertainty and regional tensions will continue to weigh on economic growth in the medium term. In our view, the proper functioning of the Lebanese government is impaired.

In November 2015, we revised the outlook on Egypt back to stable from positive. We expect Egypt’s economic recovery to remain gradual and its external imbalances to persist. We also consider that the strong external support that Egypt has received over the past few years could be affected by fiscal pressures in Gulf Cooperation Council countries.

Outside the GCC, the currencies of oil-exporting sovereigns have depreciated significantly, and some have devalued their currencies and introduced more flexible exchange rate regimes. Speculation in the market has increased about whether GCC countries would experience the same scenario, and unpeg their currencies from the dollar.

“In our view, although the risk of such an event coming to pass has increased, we expect GCC countries to maintain the exchange rate peg over the medium term, mainly because we assess GCC states as having sufficient funds available to defend their currencies. Most MENA currencies are pegged or linked to the U.S. dollar,” Mr. Cullinan said.