Middle East Region Staggers Under Ratings Downgrades

The established pattern of falling Middle Eastern credit ratings that started in 2014 continued apace in February and early March of this year, as rating agencies issued further downgrades of governments in the region.

Fitch Ratings warned of high exposures by banks to sovereign debt and domestic economies in Egypt, Jordan and Lebanon, attributing the sovereign problems in these three countries to political upheavals such as the Syrian crisis. Standard & Poor’s lowered its ratings on Saudi Arabia, Oman and Bahrain.

Moody’s Investors Service placed Kuwait, Qatar, Saudi Arabia and the United Arab Emirates on review for possible downgrade. S&P and Moody’s cited falling oil revenues, falling prices and government fiscal pressures as risks in these Gulf Cooperation Council countries.

Left unspoken is the potential for further downgrades connected to regional instability caused by the rising tensions between Saudi Arabia and Iran.

Falling oil prices and government fiscal commitments both show little room for improvement in the short and medium-terms, according to Lebanese-born and -educated Atif Kubursi, professor emeritus of economics at McMaster University in Canada and president of Middle East consulting firm Econometric Research. “The ratings and the oil prices are connected,” he says.

Oil prices may continue to fall, owing to increased supply from oil-producing nations and lower consumption in China and Europe.

Moreover, regional governments have limited wiggle room to reduce expenditures. “Most of these countries have authoritarian baggage,” says Kubursi. Governments ‘buy’ the acquiescence of the population with social benefits and will hesitate to cut them too deeply. Revenue enhancers like value-added taxes in countries such as Saudi Arabia and Bahrain won’t be popular with the people. “It might increase the political problems, so there is a trade-off,” he says.

A return to higher ratings would require price stability, increased consumption owing to a stronger global economy, reduced or stabilized production, lower government spending and a less tense geopolitical situation, which could lead to reduced military expenditures.