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 Moody’s 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.
“Buoyant oil prices and accumulated financial assets should enable most Gulf states to maintain a degree of fiscal stimulus in 2010,” says 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.”
Moody’s notes that the weaker public finances of the region’s oil importers have rendered them less able to maintain fiscal support. Nevertheless, 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 considerably weaker than pre-crisis levels and below the emerging market average.
Moody’s points 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,” says Cooper. The countries with the highest trade exposure to Europe, and therefore to any potential drop in European demand, are Tunisia and Morocco.
Moreover, Moody’s observes that the backdrop of regional geopolitical risk persists. The UN Security Council recently tightened its sanctions against Iran as it gradually ratchets up disincentives to nuclear development. Also, the risk of a flare-up in the perennial Arab-Israeli conflict remains.
