This year continues to be a year of improvement for Middle East sovereigns, said Moody's Investors Service in its new report titled “Middle East Sovereign Outlook: 2010 Mid-Year Update” released on Tuesday. However, the rating agency cautions that the pace of economic recovery is hesitant and varied (as in other regions), and that the fragility of the global environment poses downside risks. Since February Middle East Sovereign Outlook, the rating agency has implemented one further positive rating action in the region: in April, Moody's upgraded Lebanon's sovereign ratings by one notch to B1. This followed upgrades of the sovereign ratings of Saudi Arabia (to Aa3) and Oman (to A1) in February. These rating changes were mainly driven by the comparative resilience of these countries' public finances relative to rating peers. The governments of both Saudi Arabia and Oman have accumulated impressive cushions of financial assets which impart considerable fiscal flexibility, the report said. “Buoyant oil prices and accumulated financial assets should enable most Gulf states to maintain a degree of fiscal stimulus in 2010,” said Tristan Cooper, Moody's Dubai-based head analyst for Middle East Sovereigns. “This should spur private activity despite still weak consumer confidence and sluggish bank lending.” Oil prices have remained buoyant so far this year, averaging above the estimated fiscal breakeven for all of the region's oil exporters bar Bahrain. This, the report said, plus accumulated financial assets, should enable most Gulf states to maintain a degree of fiscal stimulus. This will spur private activity despite the drag of weak consumer confidence and sluggish bank lending. Given their weaker public finances, the region's oil importers are less able to offer fiscal support. Moody's noted that the weaker public finances of the region's oil importers have rendered them less able to maintain fiscal support. However, these countries' banking sectors experienced less of a “credit shock” during the 2008/09 global crisis and their growth rates have been less volatile. Although oil importers' real GDP growth is expected to recover in 2010, it will remain weaker than pre-crisis levels and below the emerging market average. Moody's pointed out that the region's two growth exceptions in 2010 remain Lebanon (on the upside) and Dubai (on the downside). Although political tensions seem to be on the rise again, Lebanon's economy has been thriving, while that of Dubai continues to be weighed down by excessive leverage and a weak real estate market. “So far, the volatility in European financial markets has not had a significant effect on the average cost of funding in the Middle East,” said Cooper. Moreover, Moody's observed that the back-drop of regional geopolitical risk persists. So far, the volatility of European financial markets and the widening of spreads in the euro zone periphery has not had a significant effect on the region's cost of funding. In fact, the region's overall level of trade exposure to Europe is lower than might be expected. Two Maghreb countries - Tunisia and Morocco - as well as Egypt, albeit to a lesser extent, currently have the strongest trade links with Europe. It is these countries that would be expected to be most affected by any potential fall in European demand (as has been the case in the past). Services exposure to Europe is more widespread, particularly in the area of tourism, although these countries have been diversifying their sources of visitors in recent years, focusing on emerging markets in Asia. The economies of oil-exporting countries would only suffer if a steep fall in Europe led to a sharp and sustained fall in oil prices.
