Middle East Country Risk Assessments

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Saudi Arabia, UAE, Iraq, Iran, Qatar and Yemen Financial and Political Risks.

 

Saudi Arabia: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
March 2011 BBB BBB BB B BBB BBB
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Sovereign risk

Stable. The sovereign’s creditworthiness is not in question, given its large stock of financial assets and its fiscal and current-account surpluses. The main constraint on the rating remains the dependence of the public finances on oil.

Currency risk

Stable. Saudi Arabia and three neighbouring states are pressing ahead with monetary union. The currency is unlikely to come under pressure as foreign capital inflows have been stable and the central bank has almost US$460bn in foreign currency and securities to back up its commitment to the peg.

Banking sector risk

Stable. Banks remain well capitalised but have been increasing provisions for bad loans. Defaults by two major family firms have led to concerns over solvency, which could make private borrowing from abroad expensive despite the strong capital bases of banks and government guarantees of bank deposits.

Political risk

Stability could be threatened by protests similar to those that have swept other countries in the region. The rule of the Al Saud faces other challenges in 2011-15, including a potentially fractious succession process and demands for political reform. Institutional effectiveness remains limited and corruption is pervasive.

Economic structure risk

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

 

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United Arab Emirates: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2011 BB BBB BB BBB B BB
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Sovereign risk

Stable. Dubai World and a number of Dubai Holding subsidiaries have formally reached agreement with creditors to restructure their debts. However, further restructurings remain a risk. Aldar Properties, Abu Dhabi’s largest developer, has received financial support from the Abu Dhabi government. Despite debt problems affecting some major corporations, the UAE is able to meet its debt obligations owing to Abu Dhabi’s vast oil reserves and foreign assets.

Currency risk

Stable. The authorities are committed to maintaining the currency peg. However, the setting up of an International Advisory Council at the Central Bank may presage a review of the peg.

Banking sector risk

Stable. Financial results of some UAE banks for 2010 indicate that provisioning levels have increased at a slower rate compared with 2009. We expect banks to increase lending in 2011, but there is a downside risk owing to the potential for further restructurings by government-related entities.

Political risk

The domestic political scene is stable, but there are concerns that protests in nearby Bahrain could encourage discontent within the UAE.

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.

 

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Iraq: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2011 CC CCC CC D C CC
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Sovereign risk

Stable. The Paris Club, Russia and China have agreed to substantial debt write-offs, but progress on debt relief with Iraq’s Arab creditors has been slow. The sovereign position is further undermined by Iraq’s uncertain political situation.

Currency risk

Stable. The Central Bank of Iraq oversees the Iraqi dinar’s informal peg to the US dollar, but ongoing security problems, and the country’s vulnerability to volatile oil prices, will ensure that concerns persist over its future stability.

Banking sector risk

Stable. Iraq does not have a developed banking sector, and in general banks suffer from poor asset quality and inadequate capitalisation, although recent moves to increase banks’ minimum capital requirements seek to remedy this. The restructuring of the two largest banks, Rasheed and Rafidain, is proving time-consuming, 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 90% of budget revenue. This leaves Iraq highly vulnerable to movements in oil prices and to any deterioration in the security situation.

 

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Iran: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
March 2011 B B CC CC BB B
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Sovereign risk

Stable. Iran’s comfortable current-account position, low level of public debt and high level of foreign-exchange reserves should enable it to meet its debt-service commitments without difficulty, but deepening international sanctions and policy uncertainty will continue to weigh on its sovereign risk rating.

Currency risk

Stable. The Iranian rial is expected to depreciate as Bank Markazi (the central bank) seeks to help non-oil exporters. However, the central bank will have to increase its level of intervention in the foreign-exchange market to avoid a widening of the spread between the official and black-market rates.

Banking sector risk

Stable. The banking sector will face a tough operating environment: political interference in lending decisions will cause the stock of non-performing loans to rise, and international sanctions will hinder banks’ operations abroad.

Political risk

The supreme leader, Ayatollah Ali Khamenei, will seek to rein in his confrontational president, Mahmoud Ahmadinejad, but ongoing factional in-fighting within the regime could seriously hinder policymaking, including efforts to lessen the burden on the budget of price subsidies.

Economic structure risk

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

 

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Qatar: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2011 AA A BBB BBB A A
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Sovereign risk

Stable. Qatar has taken on large amounts of debt to finance new gas and petrochemical facilities. However, its substantial foreign assets and revenue inflows from hydrocarbons exports will enable it to meet its debt-service obligations.

Currency risk

Stable. The Qatari riyal will remain pegged to the US dollar, and a revaluation is highly unlikely in 2011-12. The currency is supported by Qatar’s hydrocarbons revenue and foreign assets, but plans to create a Gulf single currency—albeit not within the forecast period—add a little medium-term uncertainty.

Banking sector risk

Stable. The recent directive from the Qatar Central Bank ordering conventional banks to wind up their Islamic banking divisions could raise concerns over similarly ad hoc regulatory decisions in the future.

Political risk

Calls to push a programme of political liberalisation have been boosted by recent regional events. However, if the emir accedes to these calls and proceeds with political reforms, it could create tensions among the entrenched and powerful conservative families within Qatar.

Economic structure risk

Qatar will remain heavily dependent on earnings from hydrocarbons. Oversupply in the liquefied natural gas market is a particular concern. However, the government is making efforts to diversify the economy.

 

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Yemen: risk assessment
Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk
April 2011 CC CC CCC D CCC CC
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Sovereign risk

Stable. Yemen will run wide fiscal and current-account deficits, requiring it to source increased finance from the local banking sector and from its Arab neighbours. This could prove insufficient, and much will depend on whether the recently agreed economic support package with the IMF is implemented.

Currency risk

Stable. Although the Central Bank of Yemen has managed to prevent a disorderly depreciation of the Yemeni riyal, the combination of domestic political instability and declining oil revenue has resulted in a rundown of foreign reserves, raising the risk of a maxi-devaluation.

Banking sector risk

Stable. The banking sector will continue to struggle under the burden of non-performing loans and growing exposure to the fragile public finances, although it was not directly affected by the global liquidity crunch.

Political risk

Pressure on the president, Ali Abdullah Saleh, is growing, with street protests against his regime spreading. Should he be forced from office, it is possible that Yemen will split along regional and tribal lines, threatening the country’s unity.

Economic structure risk

The heavy dependence of the public finances on the oil sector is a major structural risk, particularly given the decline in oil production. The weak private sector, falling water tables and rapid population growth are also concerns.