Mena Q4 results: Gulf becomes safer; Morocco and Tunisia resist heightened global risks


Jeremy Weltman
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A large swathe of the Middle East & North Africa (Mena) region became safer in 2012, with risks continuing to ease during Q4. Across the Gulf region, Qatar is four places off tier-one status, the safest of all ranked groupings in Euromoney’s 185-country survey, and the UAE has moved back up into tier two. Jeremy Weltman reports.

However, with Lebanon falling to the brink of tier five, and domestic security – among other factors – still a concern for parts of the region, Tunisia and Morocco stand out as offering relative safety, even when compared with some parts of Europe.

The Mena region is as diverse in risk terms as it is geographically dispersed, stretching as it does from Morocco in north-west Africa to Iran on the eastern tip of the Middle East. Coverage is sparse among the main credit rating agencies Fitch, Moody’s and Standard & Poor’s (S&P), but all 18 countries, spanning four tiered groups, are included in Euromoney’s Country Risk Survey, which collates the views of economists and other experts.

At the end of last year, 50.1 points separated gas-rich Qatar, a tier-two sovereign on a score of 73.5 points (out of 100) – and ranking 18th on Euromoney’s global risk data table – from conflict-riven Syria, a low-ranking tier-five sovereign, scoring just 23.4 points, which fell out of favour among investors and traders as it imploded under the weight of its civil strife.

Six countries in the region were still languishing in tier five, the lowest of Euromoney’s risk groups, all with scores less than 35 out of 100. The six – Egypt, Iraq, Libya, Yemen, Iran and Syria – remained largely out of bounds for investors and traders, given the ructions caused by their domestic problems, foreign policy risks and other associated economic and political factors. In spite of this, a few did see their scores partially rebound in 2012 as more stable conditions encouraged the survey’s participants to reassess their relative merits.

Gulf superiority not questioned

However, the Gulf States remained considerably safer, with five of the six safest sovereigns in the region – Qatar, Kuwait, Oman, Saudi Arabia and the United Arab Emirates (UAE) – all members of the Gulf Cooperation Council (GCC), a cosy EU-inspired union of Arab oil and gas producers. Of those, the UAE made a considerable leap in the rankings as the year drew to a close, jumping five places to 31st, and back into tier two; the safest of the Mena sovereigns.

The sixth GCC member, Bahrain, continued to be undermined by its domestic socio-political instabilities – with a low score for government stability, among other indicators – and is standing alone in tier three, failing to make the A-grade creditworthiness awarded to its tier-two counterparts.

Still, Gulf safety, coupled with the relative merits of Israel, was the main reason for the favourable position of the Mena region last year, in comparison with other parts of the world, such as Asia, Latin America and the Commonwealth of Independent States.

Moreover, just 4.6 points separated the Mena region from Central and Eastern Europe (CEE) at the end of 2012. As a distinct bloc, the GCC was safer than the CEE and, interestingly, the EU as well – where debt-crippled sovereigns saw their scores fall sharply.

Qatar knocking on the door of tier-one status

The Gulf region’s strengths are in part due to the rise of Qatar on the international stage. In 1993, when Euromoney began its surveys, the Al-Thani-ruled Arabian state ranked 36th globally, and below the UAE (then 25th), but is now 18 places higher.

Although the hydrocarbon industry – notably the production and export of liquefied natural gas – has driven the economy and ensured a strong fiscal surplus, the country is also enjoying expansion of other sectors, such as finance, construction and communications as it diversifies.

Massive infrastructure projects, worth approximately 10% of GDP, are taking place to improve the transport and utility systems – partly in preparation for the Fifa World Cup in 2022 – but without recourse to borrowing. New football stadia and railway lines, along with a metro system, airport and seaport, are among the numerous large-scale projects boosting the economy and its future potential.

The country still has low scores for several of the 15 indicators that country-risk experts are asked to reassess every quarter, such as information access/transparency (which was downgraded in Q4 2012), demographics and labour market/industrial relations (though the latter two were upgraded).

However, it scores highly for government payments/non-repatriation risk (7.8 out of 10) and for all five economic risk sub-factors; two of those, the economic-GNP outlook and employment/unemployment, score 8.0 out of 10; a third, government finances, an impressive 8.7.

Qatar’s budget surplus amounted to more than $30 billion in the first half of fiscal year 2012/13 and surpluses of around 8% of GDP are expected over the coming years, according to the IMF, as the country saves $50 billion each year until 2017, doubling the size of its FX reserves and sovereign wealth funds to $485 billion.

The UAE moves back up to tier two

Apart from the partial rebounds seen in scores for lowly ranked Yemen and Syria during Q4 2012, the most notable shift occurred for the UAE – a sovereign not rated by Fitch or S&P. Assisted in part by waning confidence in other similarly-ranked sovereigns, the UAE climbed five places in the global rankings to 31st.

As Euromoney’s survey highlights, there are still concerns among economists and other country-risk experts regarding bank stability – despite an improved score in 2012 – information access/transparency, institutional risk, the regulatory and policy environment, industrial relations and demographics, to remain cautious about its prospects. These factors are, by and large, similarly challenging across other parts of the region.

Yet, as a recent research article indicates (UAE attractive yet challenging), the UAE offers many positives. These translate into the low-risk perceptions seen in the scores for government finances and non-payments/repatriation, the infrastructure – especially in Abu Dhabi and Dubai after years of investment – and the stability of the government and the currency, the dirham, which is fixed to the dollar.

Tunisian and Moroccan risks compare favourably with parts of Europe

However, while the Gulf States are among the safest in the region, it is interesting to note that Tunisia and Morocco, now similarly ranked in 73rd and 74th places respectively, are still less risky than parts of western and eastern Europe, despite the upheavals caused by the Arab Spring and other problems that have caused the ratings agencies to question their creditworthiness. Interestingly, neither Tunisia nor Morocco was downgraded by ECR contributors in Q4.

Tunisia and Morocco might have inferior economic risk assessment scores to Algeria, but the latter’s political risks are higher, as the recent BP terrorist-kidnapping episode demonstrates. Moreover, both countries have by far the highest structural risk scores across North Africa – indeed, not lagging too far behind the Gulf States in that context.

The structural aspect of Euromoney’s survey seeks to measure the risks associated with the soft and hard infrastructure, demographic shifts and labour market/industrial relations, which can be just as key to investment and trade decisions as the economic and political factors (albeit weighted accordingly).

Moreover, as the chart (above) demonstrates, Tunisia, Morocco and even Algeria are less risky overall than many of the former Yugoslav republics, as well as other parts of emerging Europe. Tunisia, a six-place climber in the rankings last year, is barely a whisker away in score terms from EU-member Romania, despite having its credit rating downgraded by Fitch in December.

A recent article (Morocco issues new 10-year and 30-year USD Eurobonds) by one of Euromoney’s survey contributors, Samir Gadio, an emerging markets strategist at Standard Bank, highlights the considerable demand for Moroccan debt issuance and explains the country’s relative merits from a risk perspective. These are underlined by its CDS spreads, which are more in line with safer parts of the Mena region than higher-risk Egypt and Lebanon.

Don’t forget Israel, despite its political problems

The Euromoney survey also pinpoints one further option in a troubled hotspot. Despite being blighted by its political risks, and associated foreign policy and security problems – with the institutional risk and corruption indicators marked down considerably in 2012 – Israel remains one of the region’s high-flyers in overall risk terms. Again, its CDS spreads and single-A credit ratings underscore its merits.

A tier-two sovereign on 66.6 points, and having climbed six places in the rankings in 2012, despite a dip in Q4, Israel offers several favourable features of note – including high and upgraded scores for bank stability and monetary policy/currency stability, as well as a score of 8.0 for government payments/non-repatriation, the best in the region.

Which all goes to show that in a region as broad and as diverse as Mena, the risks are varied and multi-faceted.

This article was originally published in Euromoney Country Risk.