Mena ‘under pressure from Covid and low oil prices’
MANAMA: Coronavirus and low oil prices continue to keep Middle East and North Africa (Mena) sovereigns under pressure, says US-based ratings agency Fitch.
A new report by the firm shows that four of the 14 Fitch-rated Mena sovereigns are on negative outlook - Oman (which has been downgraded twice in 2020), Iraq, Jordan and Morocco - reflecting the hit to their public and external finances and growth as a result of the coronavirus pandemic and the fall in oil prices.
In addition, Fitch downgraded Bahrain in August and Lebanon’s long-term foreign-currency issuer default rating (IDR) remains on ‘RD’.
The funding of sharply wider fiscal and external deficits remains a meaningful risk for lower-rated sovereigns, even though debt market access and international liquidity have been accommodative and official creditor support has been strong.
Fundamental credit quality in the Mena region remains under pressure, despite generally improved market sentiment.
Further substantial fiscal deficits in many oil-exporting countries will drive ongoing deterioration in balance sheets.
Most GCC sovereigns will post large fiscal deficits in 2020, with only Qatar and Abu Dhabi returning single-digit deficits.
This assumes an average Brent oil price of $41 a barrel (bbl), revised up from $35/bbl in Fitch’s September Global Economic Outlook, and compliance with the OPEC+ deal to limit production.
Most fiscal break-even prices are between $65/bbl and $75/bbl, with Qatar and Bahrain outliers at below $50/bbl and above $90/bbl, respectively.
Renewed waves of infections continue to hamper external receipts, public finances, employment and GDP growth across the region.
For Mena’s oil importers, the benefit of lower oil prices is being outweighed to varying degrees by the wider pandemic impact, including on tourism and remittances, and there is generally limited space for fiscal stimulus given high public debt levels prior to the external shock.
Fitch has forecast Bahrain’s budget deficit to widen to 17.5pc of GDP in 2020 from 7.4pc of GDP in 2019, with hydrocarbon revenue (around 70pc of total revenue in 2019) almost halving.
However, it has also forecast the kingdom’s state budget deficit will narrow to 7.3pc of GDP in 2022, as oil prices stage a mild recovery (averaging close to $50/bbl in 2021-2022), economic growth gradually recovers and the government pursues fiscal reforms related to the Fiscal Balance Programme.
Under the above deficit forecasts, gross government debt/GDP would rise to nearly 130pc in 2020 and broadly stabilise in 2021-2022.
Of this, 20pc of GDP is accounted for by interest-free loans from the GCC and borrowings from the Central Bank of Bahrain.
Financial backing from richer neighbours in the GCC supports Bahrain’s ratings.
Significant uplift to reflect GCC support has been a long-standing feature of Bahrain’s rating.
Fitch believes that Bahrain will require further Gulf backing (from Saudi Arabia, Kuwait and the UAE), which it will receive given the country’s small size and strategic importance.
