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Middle East sovereigns show growing divergence, oil to average $112/b

11 March, 2013

All of Moody's-rated sovereigns in the Middle East and North Africa (MENA) have been affected by the global crisis and Arab Spring to varying degrees, but a clear divergence has emerged over recent years, with stable sovereign credit ratings among oil-rich countries and downward rating pressure facing those countries most affected by the Arab Spring, Moody's Investors Service said in a new report.

Upheavals in Tunisia, Libya, Egypt, Syria and Yemen have shaken the region's social and political landscape, and conditions remain unsettled to varying degrees in the countries that experienced regime change. At the same time, oil-rich countries of the Gulf Cooperation Council (GCC) have ramped up social welfare spending to pre-empt discontent and address longstanding needs.

Moody's expects that growth is likely to taper off in the GCC in 2013 and remain weak in oil-importing MENA. High oil prices and expansionary fiscal policies will not provide as much of a boost to GCC growth, which the rating agency estimates will slow to around 3.5% in 2013 from 5.7% in 2012. Moody's baseline scenario assumes that oil prices will average $112 per barrel in 2013, in line with the average 2012 oil price. In contrast, the average growth rate among non-oil-importing MENA countries will be around 2.6% in 2013, slightly up from 2.2% in 2012.

The ratings of oil-rich GCC countries have been stable since the global financial crisis and throughout the Arab Spring. Fiscal breakeven oil prices continue to rise in the GCC, but government finances remain strong. Indeed, with the exception of Bahrain and Oman, any vulnerability among GCC countries to a sudden fall in oil prices is mitigated by the assets held by their sovereign wealth funds. Nonetheless, while there is additional scope for ramped-up expenditure before fiscal fundamentals are undermined, Moody's expects GCC governments to continue to record large fiscal and current account surpluses, with the exception of Bahrain which has a fiscal deficit.

Despite receiving external financial support, most Arab Spring countries continue to face downward ratings pressure because of a weakening in economic, financial and external credit fundamentals -- especially Egypt which underwent a five-notch decline in its sovereign rating to B3 since early 2011. Tunisia's rating has fallen by two notches to Ba1, and Bahrain's rating by one notch to Baa1. Egypt's and Tunisia's ratings remain on review for possible downgrade. The outlooks on Bahrain's Baa1 and Jordan's Ba2 ratings have been negative since 2011, while the outlook on Morocco's Ba1 rating was changed to negative in February 2013.

Meanwhile, credit risks stemming from Dubai's government-related issuers have receded. Dubai's economy has bounced back, but its legacy debt remains high and future repayments are large.