The Middle East’s Sanded Ratings Edge
Standard & Poor’s mid-year MENA ratings report noted a one-notch average long-term foreign currency downgrade to “BBB” the past year, with the GDP-weighted mark influenced by the fall in regional powerhouse Saudi Arabia. Net energy importers Jordan, Egypt, and Lebanon were unchanged, but their outlooks went negative. Among exporters Oman and Bahrain were also demoted, while Abu Dhabi, Kuwait and Qatar are still rated “AA.” The Brent crude barrel price is estimated at $40 this year and $50 in 2017, pressuring fiscal and external accounts. GCC budget balances went from a 9 percent of GDP surplus in 2013 to the same size deficit today, and ratings stability has only been preserved in places with large backstop asset holdings. The agency emphasized that none of the dozen sovereigns covered had strong institutional and economic policy performance. Lebanon’s and Jordan’s negative outlooks, with one-third odds of outright downgrade over the next six months, were due to political and geopolitical instability and high debt burdens, while Egypt’s before the IMF rescue was from fiscal and international payments imbalances. Gulf combined deficits of $100 billion, over 9 percent of GDP, require “unprecedented financing” though debt issuance or investment income access, and strategies will affect monetary policy although dollar pegs should stay intact over the near term. Sovereign wealth funds can only be used for savings in Qatar’s case, so it resorted early to cross-border borrowing. Bahrain is the debt placement leader at 12 percent of output, but Abu Dhabi floated $5 billion in two operations in May and Saudi Arabia received a $10 billion syndicated loan. Global market volatility into the second half could frustrate further activity as domestic bank deposit growth has “slowed dramatically” from the recent double-digit clip, with tighter liquidity in Saudi and UAE institutions in particular, S&P commented. It expects net asset positions to decline sharply, at 90 percent for Oman with Bahrain already a net debtor, as creditworthiness is at its “lowest ebb” in fifteen years.
Stock market performance has been flat to negative at the same time as foreign investors stay away out of caution and participation limits. The Saudi Capital Markets Authority announced another opening stage to funds with only $1 billion in assets by year-end, but sentiment was gloomy with a near 10 percent drop on the MSCI Index through July. Consumer spending flagged in the first quarter and hospitality outlays during Ramadan were down, according to hotel operators. Bank deposits fell 3.5 percent in May, and the loan-deposit ratio was lifted to 90 percent to spur credit to scant result. Mosque terrorist attacks and costly intervention in the next-door Yemen civil war, drawing condemnation from human rights groups, have further dampened the mood. In Dubai 250 private companies have closed or exited with cutbacks or unpaid invoices, as state-linked entities face $20 billion in medium-term debt repayment originating from the 2009 crisis. Property values could dip 15 percent by next year with oil services, tourism and banking slowdown and restored Iran links cannot bridge the gap, experts warn. Tunisian shares also slipped from good early year returns as the prime minister, a US-trained economist, lost a vote of confidence as democratic and employment trends showed opposite ratings.
