Middle East Financial Country Risk Assessments

Iran, Iraq, UAE and Saudi Arabia financial risk assessments.

IRAN

Iran: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2010 B B CCC CC BB B

Stable. Iran’s comfortable current-account position and high level of foreign-exchange reserves should enable it to meet its debt-service commitments without difficulty, but the country’s international isolation and populist economic policies will continue to constrain its sovereign rating.

Sovereign risk

Currency risk

Stable. The Iranian rial is expected to depreciate as Bank Markazi (the central bank) continues to allow the currency to weaken in order to help non-oil exporters. However, the central bank will seek to manage the pace of depreciation to limit the inflationary impact.

Banking sector risk

Negative. The banking sector will face a tough operating environment, with political interference in lending decisions causing the stock of non-performing loans to rise, and international sanctions hindering banks’ operations abroad. Exposure to Dubai debt may weaken the balance sheets of some Iranian banks.

Political risk

The disputed re-election of Mahmoud Ahmadinejad in June 2009 has exposed deep divisions in the Islamic Republic. The authority of both the president and the supreme leader, Ayatollah Ali Khamenei, will be challenged.

Economic structure risk

Iran’s dependence on hydrocarbons exposes it to the vagaries of international oil and gas prices, as well as concerns over oil production and insufficient foreign investment in the sector.

SOURCE: Country Risk Service

IRAQ

Iraq: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2010 CC CC C D C CC

Stable. Although the Paris Club, Russia and China have agreed to substantial debt write-offs, progress on debt relief with Iraq’s Arab creditors has been slow. Iraq’s sovereign position is further undermined by its fiscal deficit, which reached an estimated US$3.1bn (4.1% of GDP) in 2009.Sovereign risk

Currency risk

Stable. The Central Bank of Iraq has reinstated the Iraqi dinar’s informal peg to the US dollar, but ongoing security problems, and lower oil prices compared with 2008, will ensure that concerns persist over its future stability.

Banking sector risk

Positive. Iraq does not have a developed banking sector, and in general banks suffer from poor asset quality and inadequate capitalisation. The restructuring of the two largest banks, Rasheed and Rafidain, is proving time-consuming (and potentially very expensive), hampering plans to overhaul the sector as a whole.

Political risk

Although violence has declined markedly since 2006-07, the steady drawdown of US troops may allow some of the insurgent factions to regroup, putting in danger the security improvements of the past two years.

Economic structure risk

Oil revenue constitutes around 98% of total export earnings and over 75% of budget revenue. This leaves Iraq highly vulnerable to movements in oil prices and to any deterioration in the security situation.

SOURCE: Country Risk Service

SAUDI ARABIA

Saudi Arabia: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2010 BBB BBB BB B BBB BBB

Sovereign risk

Stable. The sovereign’s creditworthiness is not in question, given its large stock of financial assets. The main constraint on the rating remains the dependence of the public finances on oil, which generates 80-90% of fiscal revenue.

Currency risk

Stable. Saudi Arabia and three neighbouring states are pressing ahead with monetary union despite the UAE’s withdrawal in May 2009. In the meantime, the central bank is committed to the currency peg and has over US$400bn in official foreign assets to supplement its foreign-exchange reserves.

Banking sector risk

Stable. Banks remain well capitalised and profitable, and the risk of a systemic crisis appears low. Defaults by two major family firms have led to concerns over the solvency of other, often financially opaque, family businesses. Saudi banks appear well protected, given strong capital bases and government guarantees of bank deposits, but they may find international borrowing more expensive, as no resolution has yet been found for foreign creditors of the defaulting firms.

Political risk

No fundamental threat to Al Saud rule is expected, but institutional effectiveness will remain very limited.

Economic structure risk

Oil accounts for some 90% of exports and government revenue, and as a result the economy is vulnerable to shifts in world oil prices and domestic oil output.

SOURCE: Country Risk Service

UNITED ARAB EMIRATES

United Arab Emirates: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2010 BB BBB BB BBB BB BB


Sovereign risk

Positive. Sovereign risk outlook has been put on a positive watch in light of the Dubai government’s plan for addressing Dubai World’s debt-service obligations. The government will provide US$9.5bn to Dubai World and Nakheel and write off US$10.1bn owed to it through a process called equitisation. The plan is contingent upon approval from creditors, which could take months.

Currency risk

Stable. The authorities are committed to maintaining the currency peg, but US dollar volatility will weigh on the rating. The UAE’s withdrawal from the proposed Gulf Co-operation Council single currency does not affect the rating.

Banking sector risk

Negative. Banks exposed to Dubai World will receive all their principal back through rolling over their debts into new facilities with maturities of five and eight years. Details of these facilities, including of interest payments, have yet to be disclosed. Banks remain at risk through their exposures to Dubai World.

Political risk

The domestic political scene is stable, and the emirs’ continued dominance over policymaking is unlikely to face serious opposition.

Economic structure risk

The UAE’s foreign assets, though reduced in value, will continue to support the economy in the downturn. However, banking, services and construction are suffering.

SOURCE: Country Risk Service