Mena creditworthiness comes under pressure
Abu Dhabi has AA rating with stable outlook due to its oil reserves
Dubai: Confidence in the ability of regional governments to repay their debts has deteriorated after the Arab Spring, ratings agency Standard & Poor's (S&P) said in Dubai yesterday.
Further pressure on the sovereign creditworthiness of nations in the Mena (Middle East and North Africa) region is also expected in the coming months amid concerns over the future of the Eurozone.
S&P says it expects to see downward ratings pressure for Bahrain, Egypt, Jordan, Oman and Tunisia as a result of domestic political turmoil and weakened economic growth prospects. The outlook is slightly better for Abu Dhabi, which currently holds AA rating with a stable outlook, due to its substantial oil reserves.
"Mena sovereigns face relatively high political risk and low levels of monetary flexibility," said Trevor Cullinan, director of sovereign ratings at S&P.
"In the GCC, the political risk is in terms of transparency over government efforts and succession risk. Furthermore, all GCC sovereigns have fixed exchange rates although in some cases that is offset by significant hydrocarbon endowment, which has the capacity to generate large revenues," he added.
S&P said each of the 13 sovereigns analysed had fixed or heavily managed exchange rates. However, the ratings agency believes macro-economic backdrop could provide the sharpest shock to creditworthiness, particularly if Greece exits the euro.
Dr Kai Stukenbrock, senior director of sovereign and international public finance ratings at S&P, said any escalation in the economic problems facing the Eurozone could have an impact on regional sovereigns.
Stuart Anderson, regional head for the Middle East at S&P, said: "This [Mena] is a region reliant on European bank funding with $60 billion worth of refinance risk. However, the Basel III [framework] means lenders do not have the capacity to participate to the extent they have previously; they do not have the balance sheets and they cannot raise capital."
Abu Dhabi is considered a less risky proposition for investors due its "substantial hydrocarbon environment" although S&P did raise concerns about levels of transparency in the emirate.
"On the downside, Abu Dhabi's rating is constrained by a lack of transparency over government assets," said Dima Jardaneh, director of sovereign ratings at S&P. "Abu Dhabi still has some way to go to match its peers at investment grade AA level as many of its institutions are still nascent and developing," she added.
Dubai The economy in Dubai has stabilised fairly well since the economic crisis and its contraction was not as severe as initially expected, ratings agency Standard & Poor's (S&P) said yesterday.
"Slack in the construction and real estate sectors was quite quickly substituted with growth in other key sectors and Dubai was also in the right position to benefit from its safe haven status," said Dima Jardaneh, director of sovereign ratings at S&P.
Several of Dubai's government-related entities face $30 billion of maturing debt this year, according to the International Monetary Fund. Earlier this week, DIFC Investments, the investment arm of the company running Dubai's financial free zone, said it was close to securing a $1 billion loan from four banks to help refinance an upcoming Islamic bond maturity.
"The refocusing of strategy on these sectors is a positive move with deleveraging on the decline and more clarity on the debt of government-related entities. The market has received all these things positively and there was a strong response to Dubai's latest bond issuance," Jardaneh added.
