Economic Country Risk Ratings – Middle East

Economic Risk Ratings for Middle East Countries: Saudi Arabia, Jordan, Egypt, Kuwait

Saudi Arabia: risk assessment
Sovereign risk  Currency risk  Banking sector risk Political risk Economic structure risk Country risk
July 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. The currency could come under pressure if the current rising trend in inflation persists. However, international capital is increasingly being drawn to the kingdom. Also, the central bank is committed to the currency peg, and it holds around US$430bn in foreign currency and securities.
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 family businesses, which could make international borrowing expensive despite the strong capital bases of banks and government guarantees of bank deposits.
Political risk
No threat to Al Saud rule is likely, but institutional effectiveness will remain very limited and corruption is pervasive.
Economic structure risk
Oil accounts for some 90% of exports and government revenue. As a result, the economy is vulnerable to shifts in world oil prices and domestic oil output.
SOURCE: Country Risk Service

Jordan: risk assessment

Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk

June 2010 B B B CCC B B

Sovereign risk

Stable. Despite the wide fiscal deficit, the government has not faced problems finding buyers for its debt at the domestic banks, and the economy managed to avoid recession in 2009. However, Jordan’s sovereign risk rating will continue to be undermined by its reliance on foreign grants and its structural deficit.

Currency risk

Stable. The Jordanian dinar will remain pegged to the US dollar. Although the current-account deficit is expected to narrow marginally in 2010, foreign direct investment will be lower than in 2005-08, which may put downward pressure on the currency, especially if the regional political situation also worsens.

Banking sector risk

Stable. The Central Bank of Jordan has tightened regulation of the financial sector in recent years, and Jordan’s banks have been relatively unscathed by the global financial crisis. The government has also extended its pledge to guarantee deposits until end-2010.

Political risk

The looming parliamentary election could cause tensions to rise between the leadership and the Islamist opposition, if the latter chooses to boycott the poll.

Economic structure risk

Jordan has a high level of public debt and relies on inflows of foreign aid and workers’ remittances to finance its fiscal and current-account deficits. It lacks natural resources and depends on imported oil.

SOURCE: Country Risk Service

Egypt: risk assessment

Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk

June 2010 BB BB BB B B BB

Sovereign risk

Stable. The current account will post surpluses in 2010-11, and growth in the external debt stock will be slow, so Egypt will not have any difficulty meeting its debt-service obligations. The external debt/GDP ratio is low, but the large and growing public domestic debt stock remains a concern.

Currency risk

Stable. The Egyptian pound is unlikely to come under pressure owing to high domestic interest rates (fuelling a carry trade) and comfortable foreign-exchange reserves, which would allow the authorities to defend the currency if needed.

Banking sector risk

Stable. The banking sector is relatively robust and has been largely unaffected by the global credit crisis. The risks of contagion remain small. The regulatory environment is being improved, with a strengthening of the Central Bank of Egypt’s supervisory role.

Political risk

The political scene faces uncertainty as the president, Hosni Mubarak, may not contest the election in 2011. Although a serious opposition candidate may emerge, the regime’s candidate—probably the president’s son Gamal—will win.

Economic structure risk

Egypt’s economy is fairly diversified compared with those of other countries in the region. However, revenue from tourism—the second-largest foreign-currency earner (after oil and gas)—is vulnerable to weakness in European demand.

SOURCE: Country Risk Service

Kuwait: risk assessment

Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk

April 2010 A BBB BB BB BBB BBB

Sovereign risk

Stable. Given Kuwait’s large fiscal surpluses and low level of public debt, debt servicing will be easily manageable in 2010-11.

Currency risk

Stable. Kuwait has ratified the agreement on a planned single currency with Saudi Arabia, Bahrain and Qatar, but this is unlikely to be implemented in the next five years. In the meantime, Kuwait is expected to retain its existing peg to a US dollar-heavy basket of currencies in the meantime. The currency is well supported by large fiscal and current-account surpluses.

Banking sector risk

Stable. Kuwait’s banking sector faces risks from the fallout of the economic slowdown in the region last year, given its exposure to defaulting companies and high levels of domestic consumer lending. However, the Central Bank of Kuwait has ample resources to ensure that the sector has adequate liquidity.

Political risk

Despite the election, in May 2009, of a new parliament, the political feuding between the executive and the legislature has continued. Relations between the government and parliament are expected to remain fraught in 2010-11.

Economic structure risk

Kuwait’s economy is heavily dependent on the oil sector. However, its large foreign assets and recent fiscal and external surpluses would provide support for its economic position even in the event of a sustained slump in oil prices.

SOURCE: Country Risk Service