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Fitch Ratings-Hong Kong-November 27: Outlooks are mostly stable on sovereign ratings in the Middle East North Africa Region (MENA), but renewed weakness in oil prices and regional and domestic political developments continue to pose a downside risk to ratings in 2020, Fitch Ratings says.
Among the 14 Fitch-rated MENA sovereigns, only Tunisia (B+) is on a Negative Outlook, maintained in June 2019. In August, Fitch downgraded Lebanon to 'CCC' from 'B-', in light of intensifying pressure on the country's financing model. A 'CCC' rating indicates that default is a real possibility, and Fitch does not typically assign Outlooks at this rating level. To different degrees, both Lebanon and Tunisia have wide twin deficits, high and rising public and external debt, a challenging political environment and tepid economic growth.
Headline fiscal balances will continue to weaken across much of the Gulf Cooperation Council (GCC) in 2020. We expect governments to reverse some of the fiscal loosening that took place amid an oil revenue windfall in 2018, but this will not be sufficient to completely offset the expected moderation of oil prices amid continued pressure on production volumes. This will mean continued deterioration of most sovereigns' debt and net foreign asset metrics.
Only in Bahrain (BB-/Stable) and Oman (BB+/Stable) do we expect narrower headline deficits in 2020 as a result of their governments' fiscal efforts. Even here lower oil prices will present challenges. These countries have the weakest balance sheets in the region and are under the most pressure to reform.
Some sovereigns are demonstrating the ability to implement fiscal and economic reforms, including Egypt (B+/Stable) and Jordan (BB-/Stable), in both cases supported by IMF programmes, which we expect to be renewed in some form. In Egypt we forecast primary surpluses and a continued decline in government debt/GDP, which will nevertheless remain high at around 80% in FY21. Falling inflation, which dropped into the single digits in 2019, is giving the central bank space to lower rates to support growth. Jordan has substantially reduced its budget deficit and stabilised government debt/GDP, although weak growth and political risks complicate further consolidation. Morocco (BBB-/Stable) has had some success in raising social spending within a prudent fiscal framework.
Elsewhere, the outlook for reforms is even more challenging. In Iraq (B-/Stable), given popular pressure for spending on public services and our assumption that average annual oil prices will decline, we forecast a swing back to budget deficits in 2019-2021. In Tunisia, delayed government formation after the recent elections could hamper fiscal consolidation and economic reforms, with negative implications for the disbursement of official funding.
Reforms to stabilise public and external finances in both oil importers and some exporters risk further social and political backlash in 2020 in the absence of economic opportunities and improved living standards to satisfy rapidly growing, young and under-employed populations. Regional conflicts and rivalries, for example between Iran and Saudi Arabia, continue to pose risks to political and economic stability across the region, having already contributed to a downgrade of Saudi Arabia's ratings to 'A'/Stable in September 2019.
Sovereign ratings in the region are concentrated towards the top and bottom of the rating scale. The oil-producing states of the Gulf Cooperation Council (GCC), along with Israel (A+/Stable), mostly lie in the 'A' and 'AA' range, owing in large part to their high GDP per capita and strong external balance sheets. The countries of the Levant and North Africa mostly populate the 'B' and lower 'BB' range, generally reflecting shakier public or external finances and more acute political risks.
Fitch Ratings 2020 Outlook: Middle East and North Africa Sovereigns is available at
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Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com.
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