Standard & Poor's Ratings Services rates 13 sovereigns in the Middle East and North Africa (MENA) region, all with high political risks and limited monetary policy flexibility that constrain the sovereign credit ratings. The nature of political risk differs across the region, and includes domestic political turmoil and succession and geopolitical risk, S&P said Monday. Institutional transparency and accountability are a further consideration in our assessment of political risk. The limits to monetary policy flexibility in the region stem from fixed or heavily managed exchange rates, compounded by small and underdeveloped capital markets. The average MENA sovereign rating is in the investment-grade category, close to 'BBB+'. When weighted by GDP the average rating is closer to 'A'. However, when considering these averages the standard deviation should be taken into account. This indicates that the spread of sovereign ratings within the region across Standard & Poor's ratings scale has always been relatively wide and has become greater over time, it said. Bahrain, Egypt, Jordan, Oman, and Tunisia have negative outlooks, indicating at least a one-in-three chance that we could lower the sovereign ratings in the next one to two years. For all five, the negative outlook reflects lower ratings forecast if political tensions were to escalate and further weaken economic prospects economic prospects or external and fiscal performance. The agency classifies the MENA sovereigns with a substantial hydrocarbon sector endowment as those with net oil exports as a percentage of their population above 5 percent in 2011. The ratings on Abu Dhabi, Kuwait, Lebanon, Morocco, Qatar, Ras Al Khaimah, and Saudi Arabia have stable outlooks, indicating that "we currently do not expect to raise or lower the ratings over the 2012-2013 ratings horizon." Oman and Bahrain are rated in the 'A' and 'BBB' categories, respectively). The average rating for those with a hydrocarbon endowment is currently close to 'A+', while for those without it is close to speculative grade. This divergence in ratings between the two groups has widened further following the onset of the Arab Spring. On average, MENA sovereign ratings deteriorated following the wave of popular uprisings that began in early 2011. "We lowered our foreign currency sovereign credit ratings on Bahrain, Egypt, and Tunisia to reflect our view of their heightened domestic political risks and the knock-on effect on their economic, external, fiscal, and monetary risks," the agency said. MENA sovereign's exchange rate regimes are for the most part conventional pegs fixed to the US dollar or to a basket of currencies with a heavy US dollar weighting. Morocco and Tunisia include the euro as well as the US dollar in their currency composites to stabilize their nominal or real effective exchange rates. Morocco is deemed to be having the highest monetary flexibility in the region, S&P said. The Moroccan dirham is pegged to an 80 percent euro and 20 percent US dollar basket. Under our criteria, the local currency rating on Morocco is one notch above its foreign currency rating. “We base this on our assessment that Morocco's monetary policy is independent and is expected to transition to a flexible exchange rate regime in the medium term.”
