Wednesday, March 11, 2020 / 01:18
PM / Fitch Ratings / Header Image Credit: Fitch Ratings
A sharp drop in oil prices adds to rating pressures
for oil-exporting Middle East and Africa (MEA) sovereigns with vulnerable
public and external finances, says Fitch Ratings. A slump in tourism, weakening
demand for non-oil exports, and financial volatility associated with the
coronavirus epidemic could also pressure rating metrics in the region.
Oil prices have slumped as the impact of coronavirus
has grown, with the decline accelerating sharply after the collapse of OPEC+
talks on 6 March led to a shift in Saudi Arabia's supply policy. Fiscal
deficits will consequently widen in all oil producers. For countries in the
Gulf Cooperation Council (GCC), we estimate that a change of USD10 in the price
per barrel of oil tends to affect government revenues by 2%-4% of GDP. Among
large African oil producers, the impact will be 1%-2% of GDP in both Angola
(B-/Stable) and Gabon (B/Stable), and 0.5% in Nigeria (B+/Negative). This will
add to the strain on public finances in some MEA issuers.
Angola, Bahrain (BB-/Stable), Iraq (B-/Stable),
Nigeria and Oman (BB+/Stable) as well as Economic and Monetary Community of
Central Africa (CEMAC) members Cameroon (B/Stable) and Gabon (B/Stable) are
among the countries where weaker balance sheets and policy buffers will limit
governments' capacity to respond to the oil price slump without putting
pressure on their ratings. However, a record of strong GCC support for Bahrain
mitigates the liquidity risks it faces from greater funding needs.
For higher-rated oil-producing sovereigns in the GCC,
such as Abu Dhabi (AA/Stable), Kuwait (AA/Stable) and Qatar (AA-/Stable), ample
fiscal and external buffers will provide greater headroom to weather the shock.
The drop in hydrocarbon prices will benefit oil importers in the MEA region.
However, we expect this will be more than offset by other adverse effects
linked to the epidemic, such as a drop in external demand and lower
remittances, which are sensitive to activity in GCC countries and the eurozone
for most MEA sovereigns.
The drop in oil prices is not the only phenomenon
associated with the coronavirus outbreak that will challenge sovereigns in the
MEA region. Prices for other commodities, including metals and agricultural products,
may be subdued by the demand shock associated with the disease. Any weakening
in mining activity would further hinder already limited growth momentum in
Namibia and South Africa. Weak growth in both countries has undermined debt
trajectories and contributed to downward pressure on ratings: Namibia was
downgraded to 'BB' from 'BB+' in October 2019, while South Africa's 'BB+'
rating remains on Negative Outlook.
In addition, global tourism flows are likely to fall
sharply in 2020. This could affect Cabo Verde (B/Positive), Egypt (B+/Stable),
Lebanon (C), Morocco (BBB-/Stable), Rwanda (B+/Stable), Seychelles (BB/Stable),
Tunisia (B+/Negative) and Uganda (B+/Stable). The severity of the virus' impact
on travel patterns will depend on the duration of the epidemic. If disruption
extends into the middle of the year, the adverse effects will increase,
affecting the northern hemisphere summer season.
Souring sentiment among international investors,
linked to the virus outbreak, could have significant adverse effects on
financing conditions for MEA sovereigns. Prior to the coronavirus outbreak, we
had expected foreign-currency issuance by Middle Eastern economies to be around
USD30 billion in 2020, representing both new financing and rollover of existing
debts. We also expected several sub-Saharan Africa sovereigns to come to
market, including Angola, Cote d'Ivoire (B+/Positive) and Nigeria.
Market volatility may impede some countries from
coming to market in the near term. However, the drop in benchmark yields and
greater availability of official creditor funding in response to the outbreak
will mitigate the tightening in funding conditions. For higher-rated GCC
sovereigns, larger funding needs are likely to be covered from ample fiscal
buffers and possibly larger Eurobond issuances.
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