The outlook for credit fundamentals for sovereigns in the Middle East and North Africa (MENA) remains stable, said Moody's Ratings in a new report.
Supportive, albeit lower, oil prices and a recovery in oil production will buttress economic growth and public finances for the region's hydrocarbon exporters. Easing monetary conditions and large investment projects will underpin steady growth for the wider region, in turn supporting further fiscal adjustment and reforms. Despite having a limited economic and fiscal impact in 2024, regional geopolitical tensions remain the main source of credit risk, said the ratings agency.
The report added that economic growth for most of MENA will be stronger in 2025, driven by oil production recovery and large investment projects. For most hydrocarbon exporters, crude oil output is set to expand as OPEC+ begins to unwind strategic production cuts, though this is subject to global demand risks. Steady economic expansion will be supported by public sector-led infrastructure and diversification projects, especially in Saudi Arabia (Aa3 stable) and the United Arab Emirates (UAE, Aa2 stable). Growth in Turkiye (B1 positive) will slow, as ongoing policy adjustment curbs domestic demand.
Lower oil prices will weigh on public finances of hydrocarbon exporters, but most other MENA sovereigns will see fiscal improvements. Broadly favourable macroeconomic conditions will support public finances, although lower oil prices will drive fiscal deterioration for most hydrocarbon-exporting sovereigns. Fiscal balances in most hydrocarbon importers will benefit from consolidation efforts, often under their existing IMF programmes. Lower global interest rates will support investor appetite for issuances of lower-rated sovereigns, easing government and external liquidity pressures, but debt affordability remains a challenge.
Geopolitics will remain the main source of credit risk. The conflicts in the region have become more complex and will continue to add uncertainty to the outlook for MENA creditworthiness. The risk of escalation will persist.
What could change the outlook. Moody’s said, “A regional war involving Iran could disrupt energy production and trade, lead to significant tightening of financing conditions and limit longer-term growth. While not in our baseline, this would turn the outlook sharply negative. A drop in global energy demand that results in lower oil production or sharply lower prices could hurt public finances and economic activity of the region’s hydrocarbon exporters, leading to a negative outlook. Conversely, a sustained de-escalation in the current conflicts and stabilisation of regional geopolitics would be positive.”
Takeaways from the report suggest that
- Real GDP growth for the region's hydrocarbon exporters is set to rise to 3.5% in 2025 from an estimated 1.9% in 2024 as Saudi Arabia, UAE, Iraq Kuwait and Oman begin to reverse some of the oil production cuts that were implemented in 2023
- The impact of large investments will be most visible in Saudi Arabia as high government and sovereign wealth fund spending related to the Vision 2030 diversification programme continues into 2025
- Growth in Qatar will be supported by the development of the petrochemical industry and construction activity related to the expansion of the LNG production capacity, scheduled to come online during 2026-2030.
- In Kuwait, non-hydrocarbon growth will be driven by large projects including the construction of a new port and a new airport terminal
- If improved domestic security conditions are sustained, Iraq's non-hydrocarbon growth will remain above pre-COVID averages due to gradual implementation of several transport and energy projects
- In the UAE, non-hydrocarbon growth will slow slightly due to the completion of some previous infrastructure projects, but will remain robust at around 5% in 2025