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Industry News
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| Middle East set to recover in 2010 as per Moody’s Investor Service |
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Moody’s Investor Service issued a report named “Middle East Sovereign Outlook: 2010” in which it noted that 2010 would be a year of economic recovery for the Middle East.
Indeed, Moody’s only sovereign rating actions in the region so far this year have been positive: the upgrade of Saudi Arabia’s government bond ratings to Aa3 from A1 and Oman’s to A1 from A2 based on the strong state of their government finances. Still, the year ahead would revolve around the following key economic elements: crude oil prices, fiscal stimulus, banks lending, remittances and investment flows, as well as import demand in key export markets.
First, international oil prices recovered in 2009, due to OPEC production cuts and important demand in emerging Asia, and reached about US$ 80 per barrel at end-2009. So far this year, the price of the benchmark Brent averaged about US$75 per barrel, a peak level, higher than the estimated 2009 fiscal breakeven point for all Gulf oil exporters, except Bahrain. For 2010, breakeven prices are linked to exports and public expenditures. An overview of the budgets published so far shows that most Gulf governments will raise expenditure as they seek to stimulate private sector growth. Also, crude exports might rise in response to the recovering global demand. Jointly, such developments might slightly push the fiscal breakeven oil price for Gulf oil exporters with the exception of Qatar, whose fiscal breakeven point is expected to decline. Assuming an average for Brent crude price at US$ 72 per barrel in 2010, Moody’s expects all Gulf governments to post surpluses with the exception of Bahrain.
Second, with regard to fiscal stimulus, asset-rich Gulf oil exporters might opt for an increase in expenditures regardless of oil prices dropping below their current level. In fact, those Gulf oil exporters that have published budgets for 2010 anticipate a further boost to spending this year. Sovereign wealth funds can finance potential fiscal deficits without putting planned investment expenditure at risk, as they amassed oil-driven fiscal surpluses over the past decade. However, oil-importing countries in the region are more constrained in their ability to fund a further increase in spending.
Third, the lending stance of banks in 2010 will determine the private sector activity in the region. In 2009, bank credit to the private sector plunged in all rated countries in the Middle East, with the exception of Lebanon whose credit growth exceeded 10% in the first ten months of the year.
Although capitalization ratios remain healthy across the region, banks are still cautious about lending. Some banks, especially those in Qatar, Kuwait and Dubai, have been exposed to quite brutal real estate price reversals which have affected asset quality. Loan-to-deposit ratios remain high in these countries, and this constrains banks’ ability to extend credit despite government support.
Fourth, Jordan, Lebanon and Egypt all benefit to varying levels from current and capital account inflows from oilrich Gulf countries. While remittances from the GCC to Egypt dropped by 10% in the third quarter of 2009, they have probably recovered since then, due to the recovery in oil prices and the stabilization of most Gulf private sectors. Moody’s anticipates this trend to continue in 2010 based on the assumption that oil prices will remain at high levels. Finally, economic growth in oil-importing countries, namely Jordan, Lebanon and Egypt, is expected to be affected by developments in their key export markets. The economies of the United States and Europe are expected to recover over the course of 2010, and Gulf countries are expected to increase their imports, given their scope for continued fiscal stimulus.
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| 04 Mar 2010 - Back |
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