Country risk: Egypt, Lebanon, Saudi Arabia et al demonstrate MENA is not equally fragile


Jeremy Weltman
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Euromoney’s country risk survey presents a mixed picture of risk for the Middle East and North Africa, with some countries more able than others to withstand the pandemic and depressed oil market.

MENA economies are walking on eggshells, with some more likely to crack under the added pressure of coronavirus than others


Risk experts have been busy downgrading the Middle East and North African region as they evaluate the likely impact of collapsing trade and tourism, as well as the negative oil price shock.

The region’s average risk score has fallen by 0.77, a bigger drop than Asia, Central and Eastern Europe, and Latin America – but not as severe as North America or the eurozone.

The first quarter survey was conducted as the coronavirus pandemic was spreading, and oil prices were sliding due to the fall in demand and supply glut exacerbated by Russia and Saudi Arabia initially failing to agree on a coordinated cut to production quotas.

Invariably this means the region is expected to feel the full force of the crisis as a result.

MENA_ECR_oil prices

The IMF’s latest World Economic Outlook provides a useful first attempt at quantifying the effects of the lockdowns and falling commodity prices on the various macro-fiscal indicators determining country risk.

What transpires are some eye-catching falls in GDP, and fiscal deficits to ponder.

Across the Gulf region, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates will now experience unified recession in 2020, as will other MENA countries stretching from Algeria and Morocco, to Libya and Lebanon.

The situation in Tunisia resembles most other countries in the region, according to ECR survey expert Mongi Boughzala, a professor of economics at the University of Tunis El Manar, who warns the negative impact on the economy will be huge.

“In countries like Tunisia, close to half of the working people make their living in the informal sector, with no or little social protection and no unemployment insurance.

“These people cannot afford to be confined for more than days. Otherwise, they face hunger – and rioting would be their most likely response.

“The Tunisian government has been trying to deal with this issue with the help of the army, with some success, but nobody can predict the outcome of the crisis should it last for months.”

Only Egypt will be spared an outright contraction of GDP, according to the IMF, but even so its growth rate will decelerate sharply, and as with almost every other country in the region, it will endure a large fiscal deficit as government revenue dries up and essential public spending is maintained.

But the region is not a homogenous one as far as investor risk is concerned, a fact confirmed by the survey’s metrics.

Nuanced approach

Given there are 15 political, economic and structural risk indicators to take account of – not to mention changes in debt ratings and an assessment of capital access – country risk is not just determined by economic growth and fiscal balances alone. A more nuanced approach is required.

There are various factors to consider, including political stability, corruption, policymaking – and even whether the country was a lower or higher risk option to begin with.

Take Saudi Arabia, which had been improving in the survey as a result of the speedy reforms to improve its image, attract more private investment and diversify the economy under Crown Prince Mohammed bin Salman since 2017.

Invariably it will be dealt a blow by the pandemic and the dip in oil prices, but it also has financial buffers to cope with the budget deficit widening to 7%-9% of GDP (according to the finance ministry’s revised estimate) given its sizeable foreign exchange reserves and sovereign wealth fund assets.

The improvement in Saudi Arabia’s risk may have halted, and its grand “Vision 2030” programme seems threatened, but it has not suddenly become a high risk, and its political risk scores vastly exceed countries in the region with weaker institutions, such as Iran, Iraq and Libya.

The coronavirus will have an adverse impact on the UAE’s economy, and it will hurt the construction and tourism sector the most 
 - Usman Khalid, United Arab Emirates University

Saudi Arabia in fact is still ranking 45th, sandwiched between Colombia and Hungary in Euromoney’s global risk table of 174 countries, and is still considered safer than any of North Africa’s borrowers.

The same can be said of the United Arab Emirates, a comparatively low risk, ranking 39th, despite its score falling in the first quarter.

“The coronavirus will have an adverse impact on the UAE’s economy, and it will hurt the construction and tourism sector the most,” says ECR expert Usman Khalid, assistant professor at United Arab Emirates University.

“Travel is the most affected sector due to Covid-19, and with Dubai being a travel and tourism hub it will see a sharp decline in tourists and hence revenues.”

While acknowledging the oil shock will also have a dampening effect on the economy, Khalid notes that the UAE has diversified its economic structure and it now relies less on oil revenues, which will moderate the impact. It also has a high score for government stability.

Israel (27th), Qatar (29th), Kuwait (33rd) and Oman (47th) are in a similar bracket – with commercial flights grounded, tourism halted and liquidity strained – but appear well-equipped to cope given their ability to implement immediate and wide-ranging fiscal and social support measures.

MENA_ECR_risk scores

Most at risk

Yet the same cannot be said for the more vulnerable countries – Iran, Iraq, Lebanon and Egypt – that are all heavily downgraded alongside highest risk Syria and Yemen.

The pandemic could not have hit at a worse time for these countries, and especially Lebanon where “even those fortunate to be collecting half their salaries are struggling to make ends meet, with inflation rampant and imports reduced to bare essentials due to the ongoing dollar crisis,” says survey contributor Alexander Heneine, a Beiruit-based financial markets and country risk analyst.

“In early March, Lebanon defaulted for the first time in its history, coinciding with the outbreak of the coronavirus, and following years of utter mismanagement, blatant corruption and the lack of any form of oversight – highlighting how the Lebanese economic and financial model is in need of an overhaul.

“This credit event leaves the country in a tight spot, with GDP expected to contract by over 10%, sending the world’s third-highest debt-to-GDP ratio closer to 200%.”

It will also spur feudalism, Heneine warns, as opportunist political parties sponsored by embezzlement and corruption, after losing legitimacy following months of nationwide protests, fill the gaps left by the public sector.

Lebanon’s country risk score has fallen more than any other country in the first quarter survey, sending the country crashing 36 places through the rankings to 163rd, but Iran, Iraq and Egypt were also heavily downgraded.

With mostly economic, but also some political indicators marked down, and capital access tightened, Egypt plunged 12 places in the global risk rankings, to 108th, Iraq 15 places to 144th, and Iran by 11 to 150th.

The IMF’s forecasts paint a murky picture for all three countries, with Egypt’s fiscal deficit widening to 7.7% of GDP this year, Iran’s to 9.8%, and Iraq a whopping 22.3% from just 0.8% last year.

But it is not a story of fiscal problems alone, bearing in mind that Iran and Iraq both score poorly on all political risk indicators, ranging from government non-payments risk and transparency through to institutional risk and government stability.

When the dust settles, these issues will be laid bare once again, and investors will have to tread extremely carefully.