Middle East Financial Country Risk Assessments

UAE, Lebanon, Kuwait, Jordan and Egypt economic risk assessments.

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

Stable. The conclusion by Dubai World (DW) of its restructuring proposal and recent bond issues by Dubai government entities signal a return to confidence in the emirate. However, the risk of more restructurings by quasi-state companies cannot be overlooked. Of greater concern is the delay in projects in Abu Dhabi. Overall, the UAE is comfortably able to meet its debt obligations owing to Abu Dhabi’s vast oil reserves and large holdings of foreign assets.

Currency risk

Stable. The authorities are committed to maintaining the currency peg. However, questions concerning the peg will arise as the Central Bank has set up an International Advisory Council to advise it on future policymaking.

Banking sector risk

Stable. Some UAE banks with large exposures to DW have increased provisioning levels and reported an increase in non-performing loans compared with end-2009. We expect UAE corporates to tap bond markets for financing, as bank lending will remain subdued for the remainder of the year.

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 oil earnings and foreign assets will continue to support the economy. However, the construction sector in Dubai remains depressed.

SOURCE: Country Risk Service

Lebanon: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
November 2010 CCC B B CC CCC B
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Sovereign risk

Stable. Lebanon has a massive public debt/GDP ratio—estimated at 139% of forecast GDP at end-August 2010. However, the growth of the economy is gradually reducing this ratio, and most of the holders are local banks investing for the long term, and so there is less danger of debt crises than it might appear.

Currency risk

Stable. Sizeable foreign reserves—which stood at US$42.6bn (including gold), a year and a half of import cover, at end-June 2010—should enable Banque du Liban (the central bank) to maintain the currency peg to the US dollar.

Banking sector risk

Stable. Immediate risks to the banking sector remain limited and deposits have been rising, but the banks’ dependence on foreign depositors and on the government’s debt-servicing capacity is a long-term vulnerability.

Political risk

Lebanese politics have moved on from the stark pro- and anti-Syrian polarisation of 2005-08, and the new government has an opportunity to govern successfully, although the issuance of indictments by the Special Tribunal for Lebanon could undermine it.

Economic structure risk

Lebanon has a massive public debt stock, the servicing of which contributes to the large fiscal deficit, and a large structural trade deficit, making its balance of payments dependent on volatile capital inflows.

SOURCE: Country Risk Service

uwait: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
November 2010 A BBB BB BB BBB BBB
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Sovereign risk

Stable. Kuwait is expected to continue to report large fiscal surpluses, which, given the low level of public debt, will mean that debt servicing will be easily manageable in 2011-12.

Currency risk

Stable. Kuwait’s large fiscal and current-account surpluses, coupled with a huge stock of foreign assets, will support the Kuwaiti dinar throughout the forecast period. Kuwait is expected to retain its existing peg to a US dollar-heavy basket of currencies.

Banking sector risk

Stable. Kuwait’s banking sector faces risks from the fallout from 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

The political feuding between the executive and the legislature continued in 2010, and relations between the government and parliament are expected to remain fraught, but they do not threaten underlying political stability.

Economic structure risk

Kuwait’s economy is heavily dependent on the oil sector. However, its large foreign assets and 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

Jordan: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
November 2010 B B B CCC B B
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Sovereign risk

Stable. The government has not faced problems finding buyers for its debt at the domestic banks, and the economy continued to grow in 2010. However, Jordan’s sovereign risk rating will continue to be undermined by its reliance on foreign grants and its wide structural fiscal deficit.

Currency risk

Stable. The Jordanian dinar will remain pegged to the US dollar. The current-account deficit is forecast to rise slightly in 2011-12 and, foreign direct investment over the forecast period will be lower than in 2006-08, which may put downward pressure on the currency, especially if the regional political situation worsens.

Banking sector risk

Stable. The Central Bank has tightened financial regulation in recent years, and Jordan’s banks have been left relatively unscathed by the global financial crisis.

Political risk

The aftermath of the parliamentary election could cause a rise in tensions between the leadership and the Islamist opposition. The question of Palestinian participation in government will also be a contentious one.

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
November 2010 BB BB BB B B BB
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Sovereign risk

Stable. The current account will return to surplus in 2011, 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 as domestic interest rates are high (fuelling a carry trade) and foreign-exchange reserves are comfortable, allowing the authorities to defend the currency if needed.

Banking sector risk

Stable. The banking sector is relatively robust and was largely unaffected by the global credit crisis. 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—possibly 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