MENA countries post sharp declines in export; sovereigns face borrowing pressure

Countries in the MENA region are experiencing some of the sharpest contractions in exports, and some sovereigns will face severe borrowing pressure in early 2021 due to economic shocks due to COVID-19, says Moody’s.

Investment-grade emerging market sovereign bond issuance climbed above $107 billion by the end of June, 53 percent higher than in the first six months of 2019, according to data from the global ratings agency.

The impact of COVID-19 has widened existing fiscal and external imbalances in emerging and frontier markets, the service said in a new research report.

Moody’s Sovereigns Global report said COVID-19 is exacerbating liquidity pressures which have caused severe stress or default for some sovereigns.

“We expect double-digit contractions in exports for emerging and frontier market economies in most regions in 2020,” said the report.

“The sharpest contraction will be in the Middle East and North Africa, among Gulf Cooperation Council (GCC) oil exporters, the region’s tourism-reliant economies including Egypt (B2 stable), and those which already had high and rising macroeconomic imbalances and pressures heading into the crisis, including Jordan (B1 stable) and Lebanon (C stable).”

Declining government revenue

There have been sharp declines in government revenue, Moody’s said, and, significant increases in spending to cushion the impact of weaker growth on households and businesses will lead to a substantial widening in fiscal deficits over 2020-21.

This will lead to a jump in government borrowing, with the largest increases in median 2020 gross borrowing requirements occurring in the Middle East and North Africa and Asia Pacific. Funding needs will remain elevated into 2021, it said.

“Emerging and frontier market economies have experienced a substantial shock through multiple channels: a drop in export values on lower commodity prices; weaker tourism and lower global demand; and volatility in non-resident capital flows,” said Michael S Higgins, Moody’s Analyst.

“We expect fiscal and external imbalances to widen and, in the most severe cases, liquidity pressures will rise toward serious stress or default,” he said.

Moody’s said some sovereigns had struggled to find external sources of borrowing to fund fiscal and external gaps, and have tapped emergency financing from international financial institutions like the International Monetary Fund and other multilateral lenders.

However, as global capital flows remain volatile, many will face substantial credit challenges through their recoveries, even if they do emerge from the crisis without defaulting. Limited fiscal space and subdued foreign direct investment are likely to inhibit greater employment creation and consumption.

Oman will face credit pressures in 2021, as it will have $1 billion to repay in the first six months of the year, and will see the greatest pressures from external debt repayments. Bahrain faces similar pressure on foreign exchange reserve adequacy, from external debt repayments due to their reliance on commodities for foreign exchange earnings. However, there is potential for an increase in GCC support for Bahrain, the report said.

(Reporting by Imogen Lillywhite; editing by Daniel Luiz)

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