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Fitch: Stable MENA Outlook Masks Widening Split between Energy Exporters and Importers

Fitch Ratings says in its 2014 Outlook report for Middle East and North Africa (MENA) sovereigns that it expects creditworthiness in the region to be Stable. Two sovereigns are on Positive Outlook, Saudi Arabia and Israel, and two are on Negative Outlook, Egypt and Tunisia. Prospects are far more favourable for the region’s oil exporters than its oil importers.

Economic performance is forecast to remain robust in the region’s oil exporters rated by Fitch – Bahrain, Kuwait and Saudi Arabia and the two members of the UAE Federation (Abu Dhabi and Ras Al-Khaimah). High government spending will boost non-oil GDP growth, though moderate increases in oil production will hold back total GDP growth.

Prospects for economic growth are much weaker in Fitch-rated oil importers – Egypt, Lebanon, Morocco, Tunisia and, to a lesser extent, Israel which is on Positive Outlook. High levels of political uncertainty and fiscal consolidation will weigh on growth, though growth will be slightly faster than in 2013 owing to a forecast improvement in the global economy.

The fiscal positions of oil exporters are forecast to deteriorate in line with lower oil prices and higher spending, although all countries apart from Bahrain are expected to post surpluses, enabling a further strengthening of buffers. Oil importers will progress with fiscal consolidation at varying speeds which will reduce the large deficits that remain in many cases. Deficit financing should be manageable, though increasingly challenging in Tunisia, Lebanon and Egypt.

Large divergences between the external positions of oil exporters and importers will remain. All oil exporters will run double-digit current account surpluses, while all importers will record deficits except Israel. External debt issuance will be limited given access to concessional funding of troubled oil importers and the surpluses run by oil exporters.

Structural reforms are likely to focus on measures to stimulate job creation in the private sector. Social pressures make the task more immediate, but also tougher to implement in oil importers. Oil exporters will aim to encourage greater hiring of nationals without jeopardising the private sector’s competitiveness.

Political risks remain significant. Near-term risks of a conflict between Israel and Iran have eased following the P5+1 deal. Israel will be vigilant in ensuring Iran keeps to its commitments in the deal and any transgression could provoke a military response. Prospects for a long-term deal are uncertain. An expansion of the civil war in Syria into neighbouring countries has the potential to impact the ratings of Lebanon and Israel. The uncertain course of domestic political transitions in Egypt and Tunisia are a source of significant downside risks for both sovereigns.

Fitch expects oil prices to drift lower and average USD100/b in 2014. The impact of variations around this forecast is asymmetric. Higher oil prices will put immediate pressure on the fiscal and external positions of energy importers. In contrast, the large external and fiscal buffers of the region’s oil importers mean their ratings are tolerant of a period of lower oil prices.

A weaker commitment to fiscal consolidation would put pressure on ratings, particularly for sovereigns where deficits are high and debt rising. Reforms to strengthen the business environment and private sector would be rating-positive.