UBS sees stable credit fundamentals for Middle East and Africa in 2020

The spread of coronavirus has had little direct impact on the GCC economies so far, the Swiss lender says in its emerging markets report

An Invest Saudi advertising hoarding hangs from the Ameron Hotel ahead of the World Economic Forum (WEF) in Davos, Switzerland, on Sunday, Jan. 19, 2020. World leaders, influential executives, bankers and policy makers attend the 50th annual meeting of the World Economic Forum in Davos from Jan. 21 - 24. Photographer: Jason Alden/Bloomberg
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The credit fundamentals of sovereign issuers in the Middle East and Africa remained stable in 2019 and the outlook of the region this year and next remains “fairly solid”, according to Swiss bank UBS.

Inflation in the region has fallen further, allowing central banks to cut interest rates to support credit growth, the lender said in a report on Thursday. Fiscal metrics in most countries have remained stable underpinned by “prudent fiscal management and healthy nominal GDP growth”, it said.

“The countries in the Gulf Co-operation Council currently benefit from low US interest rates, and we see a very low likelihood of exchange rate pegs coming under pressure,” said Michael Bolliger, UBS head of asset allocation for emerging markets.

Volatility in oil prices, which has a strong bearing on public finances, and geopolitical risks will continue to pose challenges. The impact of trade tensions on investment and a slowdown in the eurozone may pose headwinds, particularly for oil-driven economies in the region, he said.

“The need for [economic] reforms remains high, in our view,” Mr Bolliger said

The outbreak of the deadly coronavirus has had little direct impact on the GCC so far, UBS said. However, it added the spread of the virus may still indirectly affect countries in the region as global growth slows and consumer spending on tourism declines.

“We believe the downside is contained, but acknowledge the risk that the virus might spread further and faster, with a more significant impact on the global economy,” Mr Bolliger said.

The UAE's economy is heading in the right direction with reforms and efforts to diversify its economy, according to UBS. The key credit strength of the Arab world's second largest economy is underscored by factors including its history of domestic political stability, a high GDP per capita, and hydrocarbon reserves of more than 70 years at the current rate of production.

Economic growth in the UAE should pick up this year thanks to government fiscal stimulus measures, spending related to Dubai's Expo 2020 and rate cuts that are in line with the US Federal Reserve, said Ali Janoudi, UBS Middle East and Africa's head of wealth management.