Domestic political and geopolitical instability, and in particular, its detrimental impact on policymaking and in some cases growth, have informed some of Moody's Investor Service's key sovereign credit risk rating and outlook changes in 2019 across all regions, including the Middle East and Africa (MEA), as well as its research commentaries during the year, says the global rating agency in a report released earlier this week.
As for 2020, the outlook for sovereign creditworthiness is negative, reflecting Moody's expectations for the fundamental conditions that will drive sovereign credit over the next 12-18 months. A disruptive and unpredictable domestic political and geopolitical environment is exacerbating the gradual slowdown in trend GDP growth, aggravating longstanding structural bottlenecks and increasing the risk of economic or financial shocks.
In 2019, sovereigns in the Middle East and Africa recorded the majority of negative rating actions in 2019, says the report.
The downgrade of Turkey (B1 negative), after two earlier downgrades in 2018, reflected the continued erosion in the government's institutional strength and policy effectiveness.
The negative outlook change for South Africa (Baa3 negative) reflected the risk that the government will not reverse the deterioration in its finances and growth prospects, largely due to social and political obstacles to reform efforts.
The weakening of Oman's (Ba1 negative) external and fiscal accounts linked to a high reliance on the oil and gas sector led to its downgrade into speculative grade.
Lebanon's (Caa2 RUR-) dwindling external financing options, growing fiscal imbalances and policy paralysis resulted in two downgrades in 2019.
However, Egypt (B2 stable) was upgraded further to fiscal and economic reforms that will support its fiscal metrics and GDP growth.
In an unpredictable environment, growth and credit risks are tilted to the downside. Those with large current account deficits and most reliant on external capital are most exposed to financing shocks. In MEA, these would be countries like Lebanon, Tunisia (B2 negative), Turkey, and to a lesser extent South Africa.
Around the world, an increasingly populist tone is undermining domestic policy effectiveness, weakening institutional strength and compounding social and governance risks.
The continued weakening of Turkey's public institutions and unpredictable policymaking have highlighted the lack of a clear and credible plan to address the underlying causes of the country’s macro-financial distress.
In Africa and the Middle East, geopolitical risks and domestic political tensions drive policy inertia. The protests that recently erupted in Iraq (Caa1 stable) and Lebanon threaten government stability in the former and led to the resignation of the prime minister and government in the latter. In Tunisia, the elections have handed a defeat to the incumbent government linked to rising austerity fatigue among voters. In Oman, the political imperative of maintaining economic and social stability has frustrated efforts to curb further fiscal deterioration.
In Ethiopia (B1 negative), the attempted coup in Amhara underscores the government's underlying susceptibility to domestic political risk. These risks are unlikely to dissipate in the run-up to elections scheduled for 2020 given that the Ethiopian government's reform agenda risks exacerbating ethnic tensions in some parts of the country.
In South Africa, deep inequalities and resistance from key stakeholders inhibit policymakers' efforts to stabilise public finances, stimulate investment and reinvigorate growth.
Domestic and external political shocks hamper progress on fiscal adjustment and structural reforms, with many governments' fiscal positions weakening even during the relatively benign recent period of growth, says the report.
In the Levant area, Iraq and Lebanon have experienced similar political volatility. Domestic political challenges are less acute in other regions but present nonetheless.
In particular, falling growth, sticky or rising debt, and political disruption leave many emerging market (EM) sovereigns vulnerable to abrupt shifts in global sentiment or shocks that can undermine macro-financial stability or jeopardise fiscal sustainability. Investors' sentiment towards a number of large EM sovereigns has soured. In particular, in the Middle East, this is the situation in Turkey which is in the midst of difficult macroeconomic adjustment processes.
EM and Frontier Market sovereigns with weak policy credibility face the most demanding financial market conditions.
For instance, foreign currency exposure has increased for the likes of Turkey which has also seen the among largest increases in funding costs. In the Levant and Africa, spreads remain very high for Lebanon, Zambia (Caa2 negative), Ghana (B3 stable) and Tunisia, reflecting investors’ anticipation of how governments may struggle to manage the upcoming maturity walls beyond 2021. High spreads build exposure to shocks and in some cases reflect or anticipate loss of market access.