Saudi Arabia & UAE Country Risk Assessment

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Economic and Political Country Risks.

Saudi Arabia

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 riyal 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 dollar peg.

Banking sector risk

Stable. Banks remain well-capitalised but have been increasing provisions for bad loans. Defaults by two large family firms have led to concerns over solvency, which could make private borrowing from abroad expensive, despite banks’ strong capital bases 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 around 90% of export and government revenue. As a result, the economy is vulnerable to shifts in world oil prices and domestic oil output.

 

UAE

Sovereign risk

Stable. Although Dubai World and Dubai Holding, two government-related entities (GREs), have concluded debt restructuring agreements with their creditors, the risk of more restructurings cannot be ignored. In addition, Dubai GREs have more than US$30bn in debt repayments due in the next two years. In spite of Dubai’s debt problems, the UAE should be 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 of the UAE may presage a review of the peg.

Banking sector risk

Stable. Provisioning in the first quarter of 2011 increased by 35.5% year on year owing to new regulations by the Central Bank. The Economist Intelligence Unit expects a gradual recovery in the banking sector and expects banks to resume lending in 2011. However, there is a downside risk of further restructurings.

Political risk

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

Economic structure risk

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