Country Risk Weekly Bulletin 660

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Country Risk Weekly Bulletin 660

February 04, 2021

  • Oil prices to reach $65 p/b by July 2021
    ICE Brent crude oil front-month prices averaged $55.2 per barrel (p/b) in January 2021 and increased by 9.7% from $50.3 p/b in December 2020. Oil prices have been recovering from the coronavirus-led drop in 2020, as they nearly reached their level of $55.5 p/b in February 2020, right before the World Health Organization declared the coronavirus to be a global pandemic, and prices fell to an average of $33.7 p/b in March 2020. Also, prices reached $58.5 p/b on February 3, 2021, their highest level since February 2020. Oil prices have been supported by Saudi Arabia's oil production cut, a high compliance level with the output reduction of the OPEC and non-OPEC alliance, and by prospects that a coronavirus vaccine as well as stimulus packages in several countries would boost the recovery in global oil demand. In parallel, Goldman Sachs expected the increase in global oil demand to continue to rebalance the oil market, given that the logistical challenges of vaccination appear to be temporary and the vaccine seems to have a high level of efficacy. As such, it anticipated an average deficit of 0.9 million barrels per day in the global oil market in the first half of 2021. It pointed out that the relatively low drilling activity at current price levels reduces the risk of higher output from oil producers outside the OPEC and non-OPEC alliance, which will help offset the potential slowdown in demand recovery in case the vaccine fails to contain the outbreak. It forecast Brent oil prices to reach $65 p/b by July 2021, and added that the growing evidence of under-investment in the sector raises the upside potential for prices in 2022.
    Source: Goldman Sachs, Refinitiv, Byblos Research

  • Saudi government to increasingly rely on debt markets to finance deficits
    Goldman Sachs projected Saudi Arabia's fiscal deficit to narrow from 12% of GDP in 2020 to 6.4% of GDP in 2021, compared to the government's target deficit of 4.9% of GDP. It attributed the significant narrowing of the deficit to substantially higher revenues from the anticipated recovery in global oil prices, despite additional oil production cuts under the OPEC+ agreement. Also, it expected non-oil receipts to significantly rise from the hike last July in the value-added tax rate from 5% to 15%, and from the ongoing recovery in domestic activity. In addition, it anticipated public spending to remain flat this year, despite the additional outlays on coronavirus-related measures, in contrast to the government's target to reduce expenditures by 7% this year. However, it forecast public spending to decrease from 43% of GDP in 2020 to 36.7% of GDP in 2024, while it expected revenues to remain stable as a share of GDP. As such, it projected the fiscal deficit at 4.1% of GDP by 2024. It forecast the government's financing needs at about $65bn in 2021. It said that authorities plan to draw down fiscal reserves by $17.6bn in 2021 and to finance the remaining $47bn through domestic and external debt issuance. It added that, starting in 2022, the government plans to reduce its reliance on fiscal reserves and instead rely almost exclusively on debt markets. As a result, it forecast the public debt level to rise from 35% of GDP at the end of 2021 to 43% of GDP at the end of 2024, and to remain manageable.
    Source: Goldman Sachs
    Source: Goldman Sachs, Byblos Research

  • Iraqi banking sector has "very weak" macro profile
    Moody's Investors Service considered that the macro profile of the Iraqi banking system is "very weak (-)". It indicated that banks in Iraq operate in an environment of "moderate" economic strength, "very weak" institutional and governance strength, and a "very weak" susceptibility to adverse events. It attributed its assessment to the prolonged armed conflict that weighed on the economy, to high political risks, as well as to systemic corruption, a lack of transparency and the poor provisioning of public services. It said that the unfavorable security conditions and the weak legal environment have constrained the development of the Iraqi banking sector. It pointed out that seven out of the 71 banks in Iraq are state-owned and account for about 77% of the sector's total assets. It added that state-owned banks are undercapitalized, have poor corporate governance, inadequate risk management practices, and benefit from preferential treatment. Also, it noted that the sector is highly fragmented, given the elevated number of private banks. As such, it considered that the strengthening of the legal governance framework and of the country's credit bureau will accelerate the sector's growth, as it will encourage banks to relax their high collateral requirements and reduce financing costs for borrowers, which, in turn, will increase demand for loans. It noted that lending to the private sector is equivalent to 8% of GDP and considered that it could expand significantly if the operating environment and legal conditions improve. It pointed out that the system's level of non-performing loans has recently increased due to the weak operating conditions. It added that the sector's funding conditions are still favorable, as banks rely mainly on domestic funding instead of market or external funding sources.
    Source: Moody's Investors Service
    Source: Moody's Investors Service, Byblos Research

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