MENA Q3 results: Region slides due to political and economic instability

By:
Jeremy Weltman
Published on:

Qatar remains the safest MENA country while the region’s average risk score in Euromoney’s Country Risk Survey slips again during the third quarter, as economists downgrade their views on most countries polled.

Suffering still from the after-effects of the Arab Spring, the Middle East and North Africa (MENA) region saw lower scores for 15 of its 18 constituent countries during Q3 2013, in many cases continuing longer-term adverse trends. Morocco, Tunisia, Yemen, Kuwait, Algeria and Syria suffered the largest score declines.

The strife in Syria, and to a lesser extent Egypt, still reverberates around a region where populations still clamour for democratic freedoms, and is imparting increased risk on neighbouring states such as Lebanon. However, various countries from Iran and Iraq to Kuwait and parts of northern Africa are also suffering from domestic political problems affecting their risk profiles.

Many avoided the social instabilities and government upheavals witnessed in Cairo and Damascus, but ECR experts remain concerned by pockets of civil unrest, terrorism stemming from Islamist restiveness and weak fiscal positions linked to energy sector and other economic and politically-motivated weaknesses, including government subsidies necessary to counter revolt.

 

Many MENA countries held their ground in ECR’s global rankings relative to other emerging markets suffering from greater risk aversion – not only the Gulf states, backed by their solid hydrocarbon wealth, but others, too, including Jordan.

Overall, the region is still offering comparative safety relative to Latin America or Asia (see chart). The average MENA score slipped to 46.3 in Q3 2013, a drop of 0.4 on the quarter and 0.7 for the year so far, but it is still out in front.

 

While the instabilities in Syria, Libya and Yemen still weigh heavily on their respective risk profiles, the wider picture for the region remains a disparate one.

Indeed, with Qatar, ranking 18th out of the 186 countries in ECR’s survey, enjoying a modest rebound in its score since June, and lowly Syria, the riskiest MENA sovereign placed 160th, seeing its score drop to 21.8, the regional score dispersion has increased to 51.2 – its widest margin all year.

High-risk Egypt sees marginal improvement

Egypt’s declining score trend partially reversed at the end of the third quarter of 2013, but the country remains one of the riskiest in the MENA region, both in terms of its political and economic rating.

Having reached rock-bottom during the second quarter, Egypt’s ECR score rebounded slightly during Q3 2013, pushing this high-risk sovereign up four places in the global ECR rankings to 132nd.

While evidently still one of the riskiest regional investments, ECR recently reported that Egypt has seen a marginal improvement in the third quarter, with 11 of its 15 risk indicators marked up slightly, albeit from very depressed levels, to push the sovereign four places higher in the rankings to 132nd globally. This, after the sharp slide in recent years correlated with its political turmoil and economic after-effects.

Some modest improvements are expected by ECR experts in the wake of the overthrow of president Mohammed Morsi, not least better economic growth and an ameliorating balance-of-payments situation, even if cautious optimism prevails given the instabilities witnessed lately and the difficulties in restoring confidence among tourists and foreign investors.

CI Capital economists Mona Mansour and Alia Mamdouh, working alongside ECR expert Mohamed Elsherbiny, head of funds strategy and asset allocation at the Cairo-based investment bank, note several substantial downside risks for Egypt. They include the security situation, the inability to ensure political consensus and weak government execution of investment projects, not to mention energy subsidy reform, currency devaluation and the constitutional referendum bottleneck.

However, they also state: “The early shift to an expansionary policy with two consecutive 50-basis-point reductions to the interest rate confirms the government’s focus on spurring growth through supporting investments,” while noting Gulf Cooperation Council (GCC) aid has allowed the sovereign to settle overdue payments – factors behind the sovereign’s stabilizing risk profile.

By contrast, all other North African states saw lower scores this quarter – amounting to more than one point each – continuing longer-term declines witnessed in the wake of the Arab Spring uprising that first erupted in Tunisia almost three years ago.

Morocco, a reasonably high tier-four sovereign, with a fall of 1.6 points to 45.6 out of 100 has slipped three places in the rankings to 74th, belying the prior expectation among ECR economists and other country-risk experts of improving prospects – though, importantly, it should be noted that its longer-term trend is more stable than other North African states (see chart).

 

Tunisia has shed 1.5 points to 42.3 and remains rooted in 79th spot – a mid-range tier-four sovereign. Algeria, a 1.1 point faller to 37.5, and also in tier four, is two places lower in 96th, while tier-five Libya, still languishing at 148th one place below Yemen, has seen its score slip to 26.7.

Libya’s renowned troubles aside, Algeria, Morocco and Tunisia have all seen various economic and political risk indicators downgraded either this quarter or compared with a year ago. Morocco’s bank stability score is the only exception, with a 0.1 point year-on-year rise to 5.9 out of 10, to match Tunisia’s. However, all other political risk indicators score less than 5.0 (Algeria’s below 3.5).

Economic risk indicators fare a little better, but most have been downgraded, including Tunisia’s government finances, now scoring just 3.4 – the worst of all.

Tunisia’s problems, including security issues and another political crisis delaying much-needed reforms, have lately halted disbursements of IMF financing.

An agreement has been reached to broker talks between the opposing political voices that will see the Islamist government in Tunis step down as a precursor to fresh elections. However, with growth slower than expected during the first half of the year, and deteriorating trade, investment and fiscal accounts, it is no surprise that, with a faltering transition, the sovereign has fallen out of favour with ECR experts.

Riadh El Hafhdi, an economist at Credit Agricole, is concerned by Tunisia’s financing needs given its background macro-fundamentals and currency devaluation potential.

“Inflation in Tunisia is at an all-time high and hurting consumer spending. In 2014 it could be even worse as planned tax rises hurt consumer spending more, while investors stay on the sidelines.”

Slowing growth, rising unemployment and dwindling tax revenue are also keeping Morocco’s fiscal risks heightened, which, with its balance-of-payments worries, is undermining an investment-grade rating which seems unjustified on its present ECR ranking.

 

Gulf maintains safe status despite Kuwaiti slip

The Gulf states, meanwhile, have seen diverse trends during Q3, with only two of the six GCC members enjoying better scores: Bahrain is one, on the back of improved social stability, and high-flying Qatar another, although neither country has moved in the global rankings this quarter.

In the eyes of ECR experts, the latter has been unperturbed by a seamless leadership transition, promising little change from the stability and predictable policies witnessed in recent years. Growth is continuing – albeit at lower levels after completion of hydrocarbon expansion plans – with strong fiscal receipts from natural gas still being recycled into large infrastructure projects ahead of the 2022 Fifa World Cup.

Oman, Saudi Arabia and the United Arab Emirates have also held steady in the global rankings, but fellow tier-two sovereign Kuwait is down two places to 22nd on the back of a 1.2 point score reduction in Q3.

Israel the star performer this quarter

Israel has moved in the opposite direction, with scores for monetary policy/currency stability and government finances improving to keep it firmly within tier two, more than four points higher than Malaysia, the highest-ranking tier-three sovereign.

 

With real GDP growth exceeding 3% in 2013 for a second consecutive year, supported by consumer spending, a conservative approach to fiscal policy and positive spin-offs from the development of a natural gas industry outweighing its security risks, the Jewish state is the region’s strongest performer this quarter, with its Q2 score decline reversing.

Only the brave favour Iran

By contrast, Iran’s new leader Hassan Rouhani, promising a better dialogue with the US, has failed to impress ECR experts, with the country’s score sliding further this quarter and its ranking down to 152nd – keeping it among five troubled Middle Eastern hydrocarbon producers at the bottom of the MENA risk table, with Iraq, Yemen, Libya and Syria.

The country’s high economic risks – all five factors score considerably less than five out of 10 – put into context the hype surrounding the potential, but unlikely, lifting of sanctions driving up the stock market.

The country has seen its oil sales fall by half and, with limited access to foreign-currency reserves, unemployment soaring – especially among young workers – the banks snowed under with bad loans, and rampant inflation caused by a 50% currency depreciation also eroding disposable incomes and investment, the country is on the brink of economic collapse with the government short of funds.