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29 March 2024

Political event risk in region rises: Moody’s

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By Staff

Anti-government protests in Egypt last week and the revolt in Tunisia two weeks ago have raised political event risk across the Arab world, Moody’s Investors’ service said on Tuesday.

“Countries most at risk from political contagion are those with similar chronic political and socio-economic challenges,” it said.

In a statement, Moody’s listed two Gulf countries as high-risk nations-- Saudi Arabia and Bahrain, along with Jordan, Morocco, Lebanon, Libya and Algeria.

Its figures showed that those countries suffer from high unemployment and inflation rates while most of them have been reeling under massive fiscal deficits and public debt.

Citing IMF data, the report put unemployment in Saudi Arabia, the largest Arab economy, at 10 per cent while the rate is as high as 13 per cent in Jordan and Tunisia. It stood at 10 per cent in Morocco and Algeria and nine per cent in Egypt. It gave no unemployment figures for the remaining states.

Inflation in 2010 was put at 12 per cent in Egypt, the most populous Arab country, and around six per cent in Saudi Arabia, Algeria and Jordan, and five per cent in Tunisia, Libya and Lebanon.

Most of those countries also suffered from fiscal deficits in 2010, with the gap standing at 10 per cent of GDP in Algeria, nine per cent in Lebanon, eight per cent in Egypt and six per cent in Jordan.

“While each country is unique and it would be wrong to overplay generalisations, it is reasonable to assume that political contagion in the wider region is more likely in countries that display similar chronic socio-economic challenges as Tunisia and Egypt,” Moody’s said.

“Furthermore, those countries with weaker public finances would be less able to appease popular discontent through fiscal concessions. The risk is that spreading political fervour will impact countries’ fiscal and economic policies and cause structural deterioration in a country’s credit fundamentals.”

Moody’s noted that the uprising in Tunisia that toppled the government significantly raised the uncertainty of the country’s fiscal and economic outlook and undermined the predictability of government policies.
“As a result, we downgraded Tunisia’s government bond ratings to Baa3 from Baa2 and changed the ratings outlook to negative from stable…. last week’s large-scale demonstrations in Egypt are also, in our opinion, credit negative for similar reasons.”

The report said Egypt, like Tunisia, suffers from deep-seated political and socio-economic challenges, including a chronic high rate of unemployment, elevated inflation, and widespread poverty.

“These conditions, together with a desire for political change, are fuelling popular frustrations,” it said.
“We also see a possibility that Egypt will loosen fiscal policy as part of the government’s efforts to contain discontent. Rising inflation would further complicate fiscal policy by increasing the already high level of budgetary expenditure on wages and subsidies. Public finances in Egypt are already stretched.”

S&P downgrades Egypt

Standard & Poor's Ratings Services on Tuesday lowered its long-term foreign currency sovereign ratings of to 'BB' from 'BB+', and its long- and short-term local currency ratings to 'BB+/B' from 'BBB-/A-3'. The short-term foreign currency rating of 'B' was affirmed. We have also placed the long-term local and foreign currency ratings on Egypt on CreditWatch with negative implications.

The recovery rating on Egypt's senior unsecured debt is unchanged at '3', indicating our expectations of meaningful (50%-70%) recovery of principle, on a net present value basis, in the event of a default or restructuring of Egypt's commercial debt.

At the same time, we lowered to 'BB+' from 'BBB-' Egypt's transfer and convertibility assessment, our opinion on the likelihood of the sovereign restricting access to foreign exchange needed for debt service by borrowers other than the government.

"The rating actions reflect our expectation that the violent demonstrations of the past week will persist, despite the appointment of a vice-president and the dismissal of the government by President Hosni Mubarak on Jan. 29, 2011," said Standard & Poor's credit analyst Kai Stukenbrock.

“We expect the current political instability and violent conflict to affect Egypt's economic growth in 2011 and beyond, not least through the adverse impact on the important tourism sector. This follows real GDP growth of close to five per cent over the past two years. We think the conflict and the ensuing uncertainty may also weigh on Egypt's balance of payments if inward foreign direct investment (FDI) or remittances were to decrease.

“We are of the view that the government will eventually take measures to alleviate poverty by increasing fuel and food subsidies, which we believe will have negative implications for the public sector deficit. We think it will likely be difficult to tackle the deterioration of public finances given Egypt's limited fiscal flexibility. In the absence of emergency spending cuts in other areas, the budget deficit in 2011 could reach double digits, in our view, which will be difficult to finance while political uncertainty prevails. We estimate that Egypt's gross general government debt stood at almost 74% of GDP last year, well above the 'BB' median of 42% of GDP,” Stukenbrock said.

The uncertainties surrounding political stability, if prolonged, may undermine investor confidence in long-term project financing.