A US-led military strike on Iraq, if short and contained, would not result in rating changes for sovereigns in the Middle East, according to Fitch International Ratings. The agency’s assessment of the effects of a war is based on the assumption that the military theatre would be limited to Iraq and it would be followed by a regime change.
While these assumptions are clearly subject to a considerable margin of error, they envisage a scenario judged to be consistent with the geopolitical and security risk profiles already accounted for in sovereign ratings across the Middle East.
The agency pointed out that the economic effects of a pending war are already evident in the Middle East. In Egypt, the central bank floated the exchange rate at end-January, likely in anticipation of a dramatic reduction in tourism receipts and possible pressures on previous exchange rate bands. In Turkey, concerns over the war, as well as International Montary Fund (IMF) compliance, are driving yields on government securities higher and weakening the lira, complicating the treasury's 2003 financing plans.
Fitch recognizes that, if its assumptions about the war are proven incorrect, and it is more protracted and/or spills over into neighboring states, the negative regional economic effects could be much more severe. Tourism is most important for Egypt and Tunisia, and a larger than expected reduction in tourist numbers would increase the countries' 2003 current account deficits.
As large net oil importers, Israel, Lebanon and Turkey would be most affected by continued high oil prices. Heightened risk aversion on the part of international investors could raise the cost of external financing, with implications for Lebanon, Tunisia and Turkey.
Fitch currently forecasts the gross external financing requirement for the region will be $45 billion in 2003, only slightly higher than last year's estimated $44 billion, but clearly subject to an upward revision if the war is extended.
Finally, the Middle East already suffers from serious problems in attracting foreign direct investment, and a war would only make matters worse, detracting from medium-term growth and employment prospects.
In Fitch's view, a protracted or expanded conflict could also affect political stability in some countries in the region. However, the agency said that any reactive domestic unrest would likely be temporary, met with an immediate response and not constitute a material threat to the underlying political stability of any rated sovereign. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
