High and accelerating inflation could potentially hit some Middle East sovereign ratings as it sharpens political and economic risks, Moody's Investors Service said in a special comment.
The ratings of poorer, non-oil-exporting countries are more likely to be affected in the shorter term by high inflation because of their enhanced social and fiscal vulnerabilities.
However, even the ratings of affluent, oil-exporting sovereigns could be affected over the longer term if high price growth persists.
"The Middle East is currently experiencing a strong resurgence of inflation. While accelerating price growth is a global phenomenon, the Middle East region has been particularly affected because of a preponderance of fixed or heavily managed exchange rates, an oil-fuelled liquidity expansion, widespread infrastructure bottlenecks and a reliance in most countries on food imports," said Tristan Cooper, a vice-president/senior analyst at Moody's and author of the report.
According to the IMF, the Middle East experienced the highest average inflation rate of all global regions in 2007, at 10.4 per cent, and this is expected to accelerate in 2008. Although inflation is seldom a direct driver of Moody's sovereign credit ratings, it can affect them indirectly through three main channels – fiscal, political and economic – and Moody's is beginning to observe such trends among Middle Eastern sovereigns.
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