Mena credit ratings expected to remain stable in 2019
Economic growth in the Mena region will remain modest in 2019, increasing only slightly to 2.8 per cent compared with 2.6 per cent in 2018. The article outlines Mena sovereign credit rating trends for 2019 including why hydrocarbon importing sovereigns (Egypt, Jordan, Lebanon, Morocco, Ras Al Khaimah, and Sharjah) will outperform their hydrocarbon-exporting peers (Abu Dhabi, Bahrain, Iraq, Kuwait, Oman, Qatar and Saudi Arabia).
Hydrocarbon importers are predicted to grow more quickly than their regional hydrocarbon-endowed peers in 2019, partly due to the “catch-up effect” whereby countries with lower wealth levels have higher economic growth rates but also reflects ongoing reforms, strong domestic consumption and sufficiently robust external demand. S&P Global Ratings predicts four per cent economic growth for hydrocarbon importing sovereigns and 2.5 per cent from net hydrocarbon exporters — up from 2.1 per cent in 2018, and a 0.5 per cent contraction in 2017. Of the hydrocarbon importers, Egypt and Morocco will push average economic growth higher, compensating for weaker growth in the rest of their peer group.
Domestic demand will remain the main driver of lackluster growth for Jordan and Lebanon, while external demand will be dampened by persistent geopolitical tensions and weaker growth of their key economic partners including Turkey and the eurozone.
S&P Global Ratings’ economic growth outlook for Mena hydrocarbon exporters is subject to upside and downside risks predicated on future oil prices. The average Brent oil price rose to about $72 in 2018, up from $52 in 2017, and based on our assumptions, is expected to fall to $55 in 2019, remaining at that level in subsequent years. Flat oil prices and the completion of some large-scale projects are likely to result in a modest deceleration in Mena net hydrocarbon exporters’ economic growth over 20202021, to 2.3 per cent on a weighted average basis. We expect the cut in oil production by 1.2 million barrels per day agreed by Opec and its oil-producing allies, on December 7, 2018, will be mostly borne by Saudi Arabia. Economic activity will remain supported by strong government capital expenditure with positive spill overs from a pickup in hydrocarbon and in some cases, gas production. In contrast to its peers, fiscal consolidation in Bahrain could dampen its non-hydrocarbon activity despite a rise in aluminium production capacity.
Of the 13 sovereigns S&P Global Ratings rates in Mena, seven are classified as ‘investment grade’, meaning they are in the ‘BBB’ rating category or above, whilst Bahrain, Egypt, Iraq, Jordan, Lebanon, and Oman are in speculative grade. The average Mena sovereign rating has broadly stabilised at close to ‘BBB-’.
Since upgrading Egypt to ‘B’ in May 2018, S&P Global Ratings has not taken any ratings actions but has revised three outlooks. It assigned a negative outlook to Ras Al Khaimah in July 2018 before reinstating a stable outlook in December, partly due to new government revenue streams. Morocco’s outlook was moved from stable to negative, reflecting the government’s deviation from its budgetary consolidation plan, alongside our projection that budgetary pressures will likely persist over the coming two years. With the exception of Morocco, we have now assigned stable outlooks to all Mena sovereign ratings, meaning that we currently do not expect to change the ratings over the next 1-2 years.
Oil prices fell sharply from mid2014, the creditworthiness of some of the hydrocarbon exporters has significantly deteriorated as a result. Since then, we have downgraded Oman by six notches, Bahrain by five, Saudi Arabia by three, Sharjah by two, and Qatar by one notch, though these downgrades were not all a direct result of lower hydrocarbon prices. This means that the net hydrocarbon exporters’ average rating is now closer to BBB+, while the hydrocarbon importers’ average rating remains around ‘BB+’.
S&P Global Ratings has maintained its ratings on Abu Dhabi and Kuwait at AA — the highest rated sovereigns in the region. Large stocks of external assets, as a percentage of gross domestic product (GDP), provided the economies of these two sovereigns with a significant buffers following the sharp fall in hydrocarbon prices in mid-2014.