Moody’s Middle East sovereign outlook: staying the course

2010 should be a year of improvement for the Middle East as a sluggish global recovery gains momentum and investor confidence rebuilds, Moody's Investors Service predicted in its first annual "Middle East Sovereign Outlook" report.
Indeed, Moody's only sovereign rating actions in the region so far this year have been positive: the upgrade of Saudi Arabia's government bond ratings to Aa3 from A1 and Oman's to A1 from A2 based on the strong state of their government finances.
Moody's new report identifies and analyzes six key themes that will drive developments in sovereign ratings in the Middle East in 2010, namely: (1) oil price and production levels, (2) the degree of fiscal stimulus, (3) the lending stance of banks, (4) remittance and investment flows from oil exporters to oil importers, (5) demand for non-oil imports in the US and Europe, and (6) politics.
"The Middle East had a relatively "mild crisis" in that it suffered less damage as a result of the global economic and financial turmoil of the past two years than some other regions. This stands it in good stead as the world economy recuperates," said Tristan Cooper, a Vice President and Senior Credit Officer in Moody's Sovereign Risk Group.
Of course there were exceptions: Dubai, with its high debt and open economy, was the main regional casualty (although Moody's does not rate the Dubai government). Also, the private sectors of some other Gulf countries were bruised as their credit bubbles popped.
"Overall, the Middle East sovereigns did not experience anything like the deterioration in credit metrics that we saw in some other regions in 2009 — most notably the advanced industrialized countries and Eastern Europe," said Cooper. This was mainly due to (1) light reliance on international capital markets for deficit financing, (2) the quick recovery in oil prices, and (3) limited external exposure of financial sectors in most countries.
Moody's notes that there are risks to its cautiously optimistic outlook. These include the risk of a deterioration in the regional political environment (with Iran a particular concern), a sustained collapse in oil prices, and a double dip global recession.