Inflation likely to hit ratings

Dubai: The sovereign debt ratings of some Middle East countries could be downgraded because of the surge in inflation in the region, ratings agency Moody's said yesterday.

The ratings of poorer, non-oil-exporting countries such as Egypt, Jordan and Lebanon are more likely to be affected in the shorter term by high inflation because of their increased social and economic vulnerabilities.

But even the wealthy oil-exporting Gulf states could be affected over the longer term if inflation persists, Moody's said in its report Middle East: resurgent inflation sharpens fiscal and political risks.

Poor ratings result in a higher cost of borrowing for a debt issuer. The region has seen a significant growth in recent years in bond issues for funding large-scale projects.

"While accelerating price growth is a global phenomenon, the Middle East region has been particularly affected because of a preponderance of fixed or heavily managed exchange rates, an oil-fuelled liquidity expansion, widespread infrastructure bottlenecks and a reliance in most countries on food imports," said Tristan Cooper, a senior Moody's analyst and author of the report.

Of all the IMF's regional groupings, the Middle East experienced the highest average inflation rate in 2007, at 10.4 per cent, and this is expected to accelerate in 2008, the report noted. This was almost double the emerging market average of 6.4 per cent. Moody's said dollar pegs in the Gulf have acted as a shackle on monetary policy, requiring that interest rates be lowered in line with US rates, which the US Federal Reserve has been slashing since September to stimulate a weak economy. This has contributed to the weakening of the dollar-linked Gulf currencies, making imports costlier.

The Gulf states have limited control in checking the slide of their currencies if the US dollar keeps going down.

"Given that Gulf governments find it politically difficult to trim fiscal expenditure at a time of booming oil revenues and that monetary policy is heavily constrained, it is difficult to see how inflation will be effectively tamed without some upward adjustment in exchange rates," the report said, but observed that "a substantial portion" of inflation is being generated by non-tradeable factors, particularly high property rents.