Arabs urged to work for better credit rating

Arab countries need to push ahead with reforms to encourage global classification organisation to give them a better credit rating to attract foreign capital, a key Arab League institution has said.

The Kuwaiti-based Inter-Arab Investment Guarantee Corporation (IAIGC), which groups all regional nations, said high sovereign credit rating by Moody’s and other major rating agencies will help governments in their drives to woo foreign investment, a vital element in sustainable economic growth.

Good rating will also allow Arab countries to get loans at lower costs and give them access to more banks and financial establishments worldwide, IAIGC said in a study about credit rating in the region, published in its quarterly bulletin.

“High credit rating is a decisive factor in foreign direct investment in any country…international investors seeking to pump new capital and build up their portfolio rely on the sovereign credit rating of the host country as well as the rating of that country’s banks, companies and other establishments,” it said.

“For this reason, IAIGC realises the major role of credit rating in attracting FID into the Arab countries…apart from luring foreign capita, Arab states, by getting good credit rating, can also encourage their own businessmen and investors to pump more capital into the local market and bring back part of their funds abroad…regional nations should work in this direction.”

According to its Director-General Fahd Al Ibrahim, IAIGC has just created a unit for risk assessment in member states and is in the process of organising a conference to explain the importance of good credit rating.

“We urge Arab countries to study and evaluate all economic, political and social factors that affect sovereign credit rating,” he said. “This will help them ensure improved ratings and in turn expand capital flows into their economies.”

IAIGC showed foreign capital flow into the Arab World plunged by nearly $15 billion (Dh55bn) in 2009 as the investment mood was hit by the global financial crisis and slower fiscal performance in some regional countries.

From a record high of about $95bn (349bn) in 2008, FDI flow into the Arab region dipped to nearly $80.7bn in 2009, the report showed.

Most Arab countries recorded a fall in FDI flow last year, including Saudi Arabia, which has been on top of Arab capital recipients over the past decade.

From about $38.1bn in 2008, FDI into the Gulf kingdom shrank to around $35.5bn while in the UAE it slumped from $13.7bn to $8.5bn.

FDI declined from $9.4bn to $6.7bn in Egypt, from $3.6bn to $2.5bn in Morocco and from $2.8bn to $2.3bn in Jordan.

Most other Arab League nations also suffered from a drop in FDI inflow except Qatar, which recorded a sharp rise to $8.5bn from $6.7bn apparently because of continued capital flow into its mammoth gas industry. Lebanon and Sudan, two other key FDI recipients, also recorded increases last year.

“There are too many obstacles for foreign investment and inter-Arab investment in the region…they include the absence of a unified law to regulate investment in member states and failure of some governments to comply with the agreements they sign with the investors,” Ibrahim said.

“The obstacles also involve the disparity and deficiencies in legislations governing business, mainly the labour law and investment protection rules, as well as the absence of an effective judicial system to settle any trade or business issue…of course these obstacles vary from one country to another but their presence is largely obstructing capital flow into the Arab World.”

The IAIGC study showed only a handful of Arab countries have been classified globally as very low risk nations while others got low, medium or high risk rating.

The UAE, Qatar, Oman, Kuwait and Libya were rated this year as very low-risk countries in the index issued annually by the US-based Political Risk Services (PRS).

Arab members rated as low-risk nations were Saudi Arabia, Bahrain, Algeria, Morocco and Tunisia. Those in the medium-risk category were Yemen, Egypt, Syria, Jordan and Lebanon while the high-risk group included conflict-battered Iraq and Sudan.

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