The revolutions that have transformed the Arab world have also transformed economies, largely for the worse. If the so-called “Arab Spring” were to receive a credit rating, the verdict would be obvious and unfortunate: downgrades.
We have seen the multiple pathologies faced by Egypt’s economy since the January 25 revolution, from falling tourism revenues to rapidly depleting foreign currency reserves to rising unemployment to poor management. Egypt’s sovereign credit rating has been downgraded six times by Moody’s, one of the world’s leading credit agencies.
When ratings are this low, they’re called “junk.” Egypt’s ratings are now on par with Pakistan. This was certainly not the hope of those revolutionaries who stormed the gates with slogans of economic dignity, but it is the reality of today’s Egypt—an economy with enormous potential, and little to show for it.
Tunisia, too, has seen a series of downgrades from all three major credit agencies—Fitch, Moody’s, and Standard and Poor’s—since its so-called “Jasmine Revolution.” Standard and Poor’s has downgraded Tunisia’s credit rating three times since 2011. Tunisia’s rating has also entered “junk” territory.
Country credit ratings essentially determine how likely a borrower (in this case, a country) will be able to repay its debts and also help investors who trade in those debts to set prices in secondary markets. “Junk” ratings make it extremely difficult to borrow money at reasonable rates.
Though Tunisia’s economic and political health is better than Egypt’s, it can hardly afford junk bond ratings given the turmoil in its main export market and its main source of tourists: Europe. A sharp decline in tourism has led to a sharp rise in Tunisia’s budget deficit. As a percentage of its GDP, Tunisia’s budget deficit has nearly doubled from 4.8% in 2010 to 8% in 2012 and, according to Moody’s, “the outlook for 2013 is not much different from last year.”
But it’s not just Tunisia and Egypt. Virtually all of the oil-importing countries in the Middle East region face fiscal troubles. Morocco has been hurt by the slowdown in Europe, which has boosted its trade deficit. The International Monetary Fund has stepped in with some precautionary financing in 2012, but Moody’s has assigned a negative outlook to Morocco.
Jordan could hardly survive without support from the IMF and from Gulf Cooperation Council (GCC) states. Its foreign currency reserves have fallen to dangerously low levels, Meanwhile, the crisis in Syria, its negative affect on tourism as well as bottlenecks in Jordan’s trading routes and the influx of refugees into the country, will further erode Jordan’s fiscal position. Jordan’s King Abdullah has said that the cost to Jordan’s Treasury of hosting 500,000 Syrian refugees stands at USD 550 million. The UN forecasts that Syrian refugees in Jordan will reach 1.2 million by the end of the year.
Lebanon has managed to weather the storms thus far, largely because of the remittances sent home by Lebanese working abroad but the Syrian civil war inches ever closer, which will hurt tourism and domestic banks. As for Syria itself, economic deterioration is the least of its concerns as the government of Bashar Al-Assad continues its brutal repression and the nation spirals towards ever-increasing of violence that will be hard to slow—even after Assad’s ouster. On the day after, Syria, too, will face an economic reckoning.
The GCC states have fared well in terms of credit ratings. Only Bahrain has seen modest downgrades. GCC governments remain fiscally strong, underpinned by large earnings from oil and gas revenues and large capital surpluses parked in sovereign wealth funds. Still, increased spending as a result of regional events has raised the break-even price for oil across the GCC: the price at which budgets go into deficit.
Bahrain is once again the outlier. Its break-even price of oil—at USD 120—stands above the average price of USD 106 in 2012, spurring deficits. Oman, UAE, and Saudi Arabia saw a break-even price near the USD 80 range in 2012, while Kuwait’s price stood at USD 50 and Qatar at USD 40 (Qatar is more reliant on natural gas exports). Thus, they all posted surpluses even after higher spending across all governments.
The only real danger to GCC economies remains a prolonged drop in the price of oil, which seems an unlikely scenario. In 2013, the IMF forecasts oil prices above USD 102 per barrel.
Thus, the story of “two Middle Easts” has been intensified by the Arab Spring: namely the GCC states, and everybody else. A report issued by Moody’s outlines the “growing divergence between GCC and other MENA economies since Global Crisis and Arab Spring.”
“The ratings of oil-rich GCC countries have been stable since the global financial crisis and throughout the Arab Spring,” Moody’s wrote, while, “economic, financial, and external credit fundamentals have weakened in most countries affected by the Arab Spring.”
Protestors across the Arab Spring states—many of whom were driven by economic concerns—hardly foresaw the economic winter they would face.
Their new governments can no longer blame the past for their problems. They must now make growth, job creation, and political stability their number one priority. The winter can get even colder.