Levant and North Africa sovereign outlook negative as social tensions weaken reforms

Tepid growth and low levels of unemployment are fuelling social discontent, especially in Iraq and Lebanon, the report showed

Ratings agency Moody's said the outlook for sovereign issuers in the Levant and North Africa in 2020 was negative, citing rising political and social tensions that are slowing the pace of reforms and limiting the scope for fiscal consolidation in the region.

Continued weak growth and low levels of unemployment are also fuelling social discontent, especially in Iraq and Lebanon, the agency said. There have been widespread protests in both countries recently, after economic growth stagnated and unemployment rose.

“Sizeable deficits, high debt burdens and external and liquidity risks will continue to constrain sovereign creditworthiness in the Levant and North Africa region in the coming year,” said Elisa Parisi-Capone, a senior analyst at Moody’s and the report’s co-author.

In Iraq, "institutional and governance challenges will continue to limit policy effectiveness, constrain the government's capacity to respond to external and domestic shocks and weigh on the already weak competitiveness of Iraq's economy", Moody's said.

Lebanon's risk of a default on its sovereign debt has also escalated, the ratings agency said. It downgraded Lebanon's sovereign rating twice last year, and said it remains under review for a further downgrade "to reflect the potential of an imminent credit event".

Meanwhile, weak global growth could potentially intensify subdued domestic demand and reduce the benefits of competitive reforms in countries such as Morocco, Egypt, Tunisia and Jordan.

A general unpredictability within the global economy could also weaken investor confidence, leading to a rise in borrowing costs in case an outright military conflict breaks out in the Middle East. Any heightened conflict would be particularly credit negative considering the regional governments' reliance on external financing, the ratings agency cautioned.

A report by rival ratings agency S&P Global for banks in the wider Menat region on Wednesday also forecast a tough year ahead for lenders in many countries due to the macroeconomic outlook.

Jordan's economic growth will "remain highly vulnerable to external factors", the S&P report said. Although risks related to the war in Syria had eased, its economic growth continues to be tied to the stability of neighbouring countries such including Iraq and the Gulf, S&P added.

“Recent political developments have significantly affected foreign investment in the country,” it said.

Lebanon, meanwhile, will have a banking system that will remain under acute stress due to the state of its economy.

“We expect Lebanon’s GDP to contract by 2 per cent in 2020. Uncertainty regarding the political transition to a non-sectarian government and the implementation of macroeconomic reforms will weigh on the economic outlook."

The outlook for Egypt’s economy is much brighter, with a 5.5 per cent GDP growth forecast for 2020 due to infrastructure-related investments and revenues from natural gas production, but the country’s banks remain susceptible to sovereign credit risks, with some banks’ direct exposure to sovereign bonds representing 30 per cent of total assets. Despite this, S&P expects Egyptian banks’ asset quality to improve as the economy grows and credit losses remain manageable.