The 2019 stable outlook for sovereign creditworthiness in the Levant and North Africa region reflects support from modest domestic growth and some expected further progress on fiscal consolidation, set against the slowing pace of structural and fiscal reforms in most countries, Moody’s Investors Service said in a report on Tuesday.
The report titled, “Sovereigns – Levant & North Africa: 2019 outlook stable, but global headwinds and slowing reforms point to downside risks”, is an update to the markets and does not constitute a rating action.
“High debt burdens, low debt affordability, and large funding needs expose the Levant and North Africa region to rising interest rates and shifting capital flows,” said Alexander Perjessy, Moody’s vice president and co-author of the report.
Although, Moody’s expects that the regional median debt ratio peaked at 83% of GDP in 2018, higher interest rates will further erode debt affordability in all countries, which could have repercussions for Moody’s fiscal strength assessments.
Fiscal and debt metrics remain sensitive to a sharper increase in interest rates than currently assumed, in particular for Lebanon, Egypt, and Jordan. Tighter global financing conditions present liquidity risks, while external vulnerability risks remain in much of the region due to large external imbalances and reliance on external funding.
“The improving security situation in some former conflict areas and planned reconstruction drives will support creditworthiness.”
“However, slowing global growth will weigh on sovereigns with material trade exposures to Europe, while the region is also still exposed to domestic political and geopolitical risks.”
Regional GDP growth will remain well below pre-2009 trends, weighed down by unresolved structural challenges and insufficient to materially reduce unemployment. With only moderate growth, the scope for reforms that would address some of these long-term constraints will be limited in most countries.
All governments except Lebanon will continue to reduce fiscal deficits as part of IMF programmes, but they will face increasing opposition to such measures, especially if growth slows or oil prices rise.
Social discontent among the largely young populations, underscored by elevated unemployment rates, as well as political gridlock from sectarian tensions, will continue to fuel domestic political risks across the region.