Interpreting Middle East Economic News and Analyzing Market Trends

Egypt close to default and Bahrain one step away from junk bond status

Cyprus has been dominating the financial news over the past two weeks.  The crisis seemed to come out of nowhere and rattle financial markets.  There are many questions that come up with events like these.  One key question is, did this crisis really come out of nowhere?  Another key question is, how can we spot potential crisis in the future?  What about the Middle East and the GCC in particular, are there any trouble spots?


The answer to the first question is no.  Financial markets had plenty of early warning signs that something was coming up.  As early as December 2011, Cyprus had a BBB investment grade rating by the major rating agencies.  From there, it quickly went into junk territory (below BBB).  Since the crisis in Greece in 2011, signs began to appear that Cyprus was having trouble too.  Officials at the time made a point to say Cyprus was in good shape, even though it wasn’t.  Last April, reports came out stating that Cyprus’s largest bank (the one that’s now defunct) will need a bailout.  Early this year, the country’s new president made a point of saying he will swiftly address the economic needs of the country, but only one major newspaper pick up the fact that Cyprus will become the next Greece.

Country S&P Outlook Fitch Outlook Moody’s Outlook
 Bahrain BBB Negative BBB Stable Baa1 Negative
 Belgium AA Negative AA Stable Aa3 Negative
 China AA- Stable A+ Stable Aa3 Positive
 Cyprus CCC Negative BB- Negative Caa3 Negative
 Egypt B- Negative B Negative Caa1 Negative
 France AA+ Negative AAA Negative Aa1 Negative
 Germany AAA Negative AAA Stable Aaa Negative
 Greece B- Stable CCC Stable C  
 Hungary BB Stable BB+ Negative Ba1 Negative
 India BBB- Negative BBB- Negative Baa3 Stable
Indonesia BB+ Positive BBB- Stable Baa3 Stable
 Ireland BBB+ Stable BBB+ Stable Ba1 Negative
 Italy BBB+ Negative BBB+ Negative Baa2 Negative
 Japan AA- Negative A+ Negative Aa3 Stable
 Jordan BB Negative     Ba2 Negative
 Kuwait AA Stable AA Stable Aa2 Stable
Lebanon B Stable B Stable B1 Stable
 Malaysia A- Stable A- Stable A3 Stable
 Morocco BBB- Stable BBB- Stable Ba1 Stable
 Netherlands AAA Negative AAA Stable Aaa Negative
 Oman A Negative     A1 Stable
Pakistan B- Stable     Caa1 Negative
 Qatar AA Stable     Aa2 Stable
 Russia BBB Stable BBB Stable Baa1 Stable
 Saudi Arabia AA- Stable AA- Stable Aa3 Stable
 Singapore AAA Stable AAA Stable Aaa Stable
 Spain BBB- Negative BBB Negative Baa3 Negative
 Switzerland AAA Stable AAA Stable Aaa Stable
Tunisia BB- Negative BBB- Negative Baa3 Negative
Turkey BB Stable BBB- Stable Ba1 Positive
 UAE AA Stable AA Stable Aa2 Stable
 United Kingdom AAA Stable AAA Negative Aa1 Stable
 United States AA+ Negative AAA Negative Aaa Negative

Source: S&P, Moody’s, Fitch.

BLUE = Investment Grade

YELLOW = Borderline, next step down is junk

ORANGE = Non-investment Grade (Junk)

RED = Highly risky and in or near default

Things quickly change in the market.  It took Cyprus only 15 months to go from investment grade to below junk.  Blame this on rating agencies lagging the news and reality.  If you can’t trust rating agencies to give you an accurate outlook on a sovereign or corporate bond, then how can you determine the risk of an investment and come up with a proper price?

Though not a perfect science, one can look at current ratings and see which ones have been downgraded recently.  Then take a closer look to see how quickly they are being downgraded.  Countries and companies that are being downgraded fast are not headed for trouble, they are already in trouble regardless of whether they are still investment grade.

Take a look at the table above and notice the ratings of the countries in the Middle East.  Not all countries are rated, but we’ve listed all the countries in the Middle East and North Africa that have a rating.  Next, take a look at the countries that are the highest rated.  They are Kuwait, Qatar and the UAE, all three are rated AA, which is the highest for the region.  Now take a look at the lowest rated.  Egypt, Jordan and Lebanon are rated junkCountries on the edge of falling into junk status include Bahrain, Morocco and TunisiaCountries at risk of defaulting include Egypt and Pakistan.  On the positive side, Turkey may soon be upgrade to investment grade.

What are the chances of Bahrain being downgrade?  It is highly likely, which will make it the first GCC country to achieve junk status.  However, being downgraded to junk does not mean that the country is headed for default.  Bahrain can easily avoid this, especially with support from other GCC nations.  Egypt, on the other hand, is on the path of default.  There are no signs so far that the country can avoid this fate.  News continues to go from bad to worse in Egypt and the country is in desperate need to cash.  See our earlier posts on Egypt, here, here and here.  Don’t rely on government assurances or media reports stating that all is well and don’t rely on rating agencies to be up to date with the latest health report of a country.