Regional headwinds limit benefits of low oil prices

This is the second part of Moody’s report on MENA sovereigns outlook following the oil price shock and persistent regional conflicts.

These countries have recently implemented structural reform agendas geared toward improving public investment efficiency and promoting a sustainable return to pre-crisis potential growth rates under the supervision of IMF programs.

Fiscal and external improvements in Morocco’s credit profile reduce the need to renew the Precautionary and Liquidity Line; whereas both Jordan and Tunisia are in the process of negotiating a follow-up program with the IMF starting 2016.

Tunisia’s reform implementation has faced delays, but agreed reforms remain on the agenda. Delayed reforms include (i) strengthening banking sector regulation and supervisory framework; (ii) clarifying the bankruptcy framework to clear legacy issues; (iii) the controversial new investment code to bridge the pronounced on-shore/offshore gap; in addition to (iv) fiscal reform to promote more inclusive growth. For instance, the long-delayed investment code debate has recently moved to the near-term pipeline and has been scheduled for debate in parliament by March 2016. The IMF also pointed to worsening budget composition and to the need to reverse the increase in current expenditures and to the detriment of capital expenditures.

Jordan focused on eliminating subsidies and restructuring the electricity company. The country’s two-year Stand-By Arrangement with the IMF, which expired in August 2015, has helped shore up confidence in the peg. Reforms have included phasing out energy subsidies, with the elimination of fuel pump subsidies and the reestablishment of an automatic pricing mechanism in late 2012, accompanied by cash transfers to about 70 percent of the population. Nonetheless, some reforms have been delayed, such as the reduction of the personal income tax minimum threshold in order to broaden the number of tax payers and labour market reforms. That said, multilateral support remains solid: a further $1.5 billion IMF extended fund facility program is reportedly being discussed for 2016-18.

Egypt’s reforms have had mixed results. Some progress has been achieved in reducing the large current expenditure bill, with hikes in fuel prices and electricity tariffs over 2014-15. Under the government’s subsidy reform plan, energy prices are to reach cost recovery levels by 2019. However, while commitment to gradual fiscal consolidation appears to be strong, there are significant implementation risks. For example, the new parliament rejected a civil service law in February that was previously ratified by the government to reform the public sector wage bill. Revenue reforms focus on turning the current sales tax into a value added tax. The draft law approved by the Cabinet and awaiting approval from the parliament proposes a rate higher than the current 10 percent rate of the goods and services tax, and would, according to estimates by the government, deliver 1.2 percent of GDP in additional revenues. Progress towards improving the business envi- ronment has been slow, bar the new investment law in 2015 that addresses dispute resolution. Infrastructure bottlenecks and unreliable energy supply, together with an inflexible and inefficient labour market remain key constraints for Egypt’s business environment.

Persistent political stalemate hampers reform implementation in Lebanon. The country has been without a president since May 2014 and consensus on economic and fiscal reforms often remains elusive. Meetings between the leaders of the Free Patriotic Movement and the Lebanese Forces suggest that Christian factions will likely agree on a candidate, but they have yet to reach an agreement with other factions. That said, the pending election of a president could unlock a series of reforms and boost confidence and growth.

Morocco and Jordan have seen a continued improvement in their fiscal accounts, which only partially offsets the deterioration in 2011-13. To a large extent the improvement is related to lower oil prices, which has decreased the cost of subsidies. A number of fiscal reforms have also been implemented, supported by IMF programs. However, the fiscal trend of Tunisia, Lebanon and Egypt remains mixed.

Morocco’s fiscal position will strengthen gradually. After reaching a fiscal deficit of 4.9 percent of GDP in 2014, down from 5.1 percent in 2013, budget execution is so far on target to reach the 4.3 percent deficit budgeted by the government for 2015. The country’s debt burden is high at an expected 65.1 percent in 2016 as compared to Ba-rated peers but it remains affordable. Moreover, the country’s relatively low foreign-currency exposure reduces its susceptibility to currency depreciation shocks. Subsidies on petroleum products — except for LPG or cooking gas — were eliminated ahead of schedule as of January 2015 and the prices of these products were fully liberalized at end-November 2015.

Social pressures and security expenses will contain fiscal improvements in Tunisia. After the revolution in January 2011, the country’s budget deficit bulged under expansionary fiscal measures to 6.8 percent of GDP in 2013 (excluding grants and privatization receipts). The energy subsidy reform initiated in 2014 was aided by lower oil prices, and the underexecution of capital expenditures helped reduce the deficit to 4.7 percent of GDP in 2015. But the budget composition has deteriorated following further increases in the wage share to an expected 14.5 percent of GDP in 2016 following generous wage agreements to ensure social peace over an extended period of time. Together with the high debt-to-GDP ratio (56.3 percent of GDP expected in 2016), Tunisia’s fiscal strength is also constrained by the large share of foreign-currency debt which makes its debt trajectory vulnerable to depreciation shocks. That said, debt affordability is supported by the strong financial support and the favourable terms granted by multilateral and bilateral external creditors.

Lower oil prices and the restructuring of NEPCO have shored up Jordan’s fis- cal position. Jordan has experienced the most dramatic improvement in its fiscal balance among the five countries covered in this section. Low global oil prices have had a strong positive effect, helping to reign in fiscal account deficits, which have contributed to a large rise in debt levels over the last few years. The combined deficit of the central government and electricity company National Electric Power Company (NEPCO) came in at 3.2 percent of GDP in 2015, slightly higher than we had forecast but markedly lower than the 10.0 percent of GDP recorded in 2014. The government implemented ambitious structural reforms, including lifting fuel subsidies, and increased electricity and water tariffs to reduce the losses at NEPCO, which is close to reaching a balanced budget, owing to the further decline in petroleum product prices and increased LNG volumes for electricity production. Nonetheless, social pressure — including high youth unemployment — constrains public-sector payroll, while foreign grants — which represented close to 8 percent of revenue in 2015 could go down as a result of the GCC’s fiscal strains. Jordan’s public debt ratio has reached a peak of 90.7 percent of GDP in 2015 and we expect it to decline to 88.3 percent in 2016.

Lebanon’s divisive political climate is keeping fiscal pressures elevated. The government will run large fiscal deficits in 2016-17, owing to high and rising debt-servicing costs, a low tax base and the weight of recent hiring in the public sector.

To be continued tomorrow