Fitch: Oil Price Fall Narrowing Divergence in MENA Sovereign Credit Trends
Fitch Ratings says in a new report that the divergence between the ratings of energy exporters and importers in the Middle East and North Africa (MENA) is narrowing due to lower oil prices. Lower oil prices have changed the economic environment for the region’s exporters.
They will reduce fiscal and external outturns and hit corporate and consumer confidence. Fitch expects Brent crude to average USD70/b in 2015 and USD80/b in 2016. The extent of the impact on the fiscal position depends on the policy response, although in a region where growth is dependent on government spending, fiscal consolidation is likely to have negative impacts on growth.
Abu Dhabi and Saudi Arabia are the only Fitch-rated oil exporters to have released 2015 budgets so far. Abu Dhabi cut budgeted spending by one-third. Saudi Arabia issued an expansionary budget, but overspending (which has averaged 25% over the past decade) is likely to be curtailed. Capacity to absorb lower oil prices varies in line with ratings.
Bahrain (BBB/Negative) seems the most strained, with a 2014 fiscal breakeven oil price of USD130/b and debt/GDP already above the peer median, and was placed on a Negative Outlook in December. Oman also requires more than USD100/b to balance its budget, but has sovereign wealth fund assets and a low debt burden.
‘AA’ rated Abu Dhabi and Kuwait are still expected to post fiscal and external surpluses in 2015 and net sovereign foreign assets in excess of 150% of GDP provide vast buffers in the event of prolonged low oil prices.
In Saudi Arabia (AA), the impact on the fiscal position has been aggravated by a spending package worth 3.9% of 2014 GDP announced by the new King. However, the Kingdom has exceptionally large buffers and virtually no debt, although it is examining debt financing options. The smooth succession and appointment of a member of the third generation of the royal family in the line of succession removes a potential source of political risk.
Oil importers are benefiting from lower prices through reduced import bills and lower fuel subsidy costs. Jordan stands to gain the most, with net fuel imports of 16% of GDP and fuel subsidies (transfers to the state electricity generating company) of around 8% of GDP.
Net fuel imports for Lebanon and Morocco both exceed 10% of GDP. Egypt is a small net importer, but spent around 6% of GDP on fuel subsidies in FY14 (to end June). Subsidy reform combined with lower oil prices were a contributory factor to the recent upgrade of Egypt to ‘B’.
Fitch views geopolitical risk as elevated compared with other regions. ISIS activity poses risks to several MENA sovereigns. The potential for worsening spill over from events in Syria is reflected in the Negative Outlook on Lebanon (B).
Domestic political transitions also remain a source of uncertainty and undermine the environment for economic reform and performance. Progress has been made in Egypt (B) and Tunisia (BB-), although the risks for the latter remain captured in its Negative Outlook. The ratings of MENA energy importers range from ‘BBB-‘ (Morocco) to ‘B’ (Egypt and Lebanon). Energy exporters’ ratings range from ‘BBB’ in Bahrain to ‘AA’ in Abu Dhabi, Kuwait and Saudi Arabia.
Source: Reuters
