The Middle East and North Africa (MENA) sovereign ratings illustrate the sharp economic and fiscal divisions as well as the political dynamics between the oil-exporting Gulf Cooperation Council (GCC) and the rest of the MENA region, says Moody’s Investors Service in an update to its Sovereign Outlook report on the region published 4 March 2014.
“GCC sovereigns all have investment-grade ratings, generally reflecting strong fiscal and external fundamentals. In addition, all but one, Bahrain, have stable outlooks,” says Tom Byrne (pictured), a Moody’s Senior Vice President and author of the report. “The rest of the MENA region is continuing to experience strains in their credit fundamentals following the global financial crisis and Arab Spring political upheaval,” adds Byrne.
Moody’s expects that GCC economic growth will remain firm, overall, in 2014, supported by the non-hydrocarbon sector, but inflation will rise.
Fiscal policies, however, will not provide as much of a boost to growth in the GCC countries, which Moody’s sees at around 4.3 percent in 2014 and 4.2 percent in 2015. Demand-pull inflation will rise, but stay at manageable, low single-digit levels.
Moody’s also notes in the report that fiscal space is being squeezed in the GCC. The rating agency’s central scenario is that oil prices will average $107 per barrel in 2014, slightly below 2013’s average oil price.
Growth in budgetary spending will likely continue to slow in 2014 as higher fiscal breakeven oil prices restrain fiscal policy space. However, all GCC countries – except for Bahrain – will continue to run fiscal surpluses and see stable debt ratios. In addition, contingent risks from public-sector corporate debt are manageable and those from the banking sector are remote.
In addition, Moody’s expects that external strengths will provide substantial credit support in the event of further loss of fiscal space.
For the larger GCC economies, the external breakeven oil price range is approximately $10-$20 per barrel lower than the fiscal breakeven price range, and estimated sovereign wealth fund external assets are a large multiple of annual government expenditure and public debt.
Furthermore, Moody’s anticipates that growth will remain subdued and fiscal challenges in 2014 will persist for the non-GCC region. In contrast to the GCC, the rating agency forecasts lower GDP growth in oil-importing MENA economies in 2014, 2.9 percent on average, but rising to 4.2 percent in 2015—if political risks abate.