Country Risk Weekly Bulletin 661

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Country Risk Weekly Bulletin 661

February 11, 2021

  • Higher oil prices unlikely to restore Iraq's public finances and external sector sustainability
    Citi Research considered that the better outlook for global oil prices would provide Iraqi authorities with time to implement their reforms plan, but it did not expect higher oil prices to put Iraq's fiscal and external finances on a sustainable path. It forecast oil prices to rise from an average of $41.7 per barrel (p/b) in 2020 to $59 p/b in 2021 and $58 p/b in 2022, before gradually declining to $51 p/b by 2025.

    It projected Iraq's fiscal deficit to narrow from 16.4% of GDP in 2020 to 6.2% of GDP in 2021, and to remain at 5% of GDP to 6% of GDP between 2022 and 2025, supported by higher oil prices, a gradual increase in oil production, and the devaluation of the Iraqi dinar. It also expected the government's debt level to drop from 91.3% of GDP at the end of 2020 to 62.6% of GDP at end-2021. But it noted that the anticipated decline in the debt level is mostly due to the normalization of hydrocarbon revenues and nominal GDP, following their substantial drop in 2020 that led the debt level to nearly double last year. It pointed out that the currency devaluation will have a limited impact on the debt trajectory, and projected the government's debt level to rise to 65% of GDP by the end of 2022 and to reach 76.7% of GDP by end-2025. It cautioned that the fiscal deficit would remain around 8% of GDP during the 2021-25 period in case oil prices average about $40 p/b, while the debt level would reach 100% of GDP by the end of 2025. 

    Further, it forecast the current account deficit to narrow from 13% of GDP in 2020 to 1.5% of GDP in 2021, but it expected the deficit to gradually widen afterwards to 4.4% of GDP by 2025. It noted that the Central Bank of Iraq's (CBI) foreign currency reserves will comfortably finance the current account deficit and external debt servicing of $500m in 2021. It added that disbursements from the International Monetary Fund, estimated at $6bn this year, would support the CBI's reserves. As such, it projected the latter to reach $55bn at the end of 2021 but to gradually decline to $31bn by end-2025 as the current account deficit widens. It cautioned that the CBI's reserves could drop to below $20bn by 2023 in case oil prices average $40 p/b. Under these conditions, it said that support to the non-oil economy is key to achieving sustainable fiscal and external balances. 
    Source: Citi Research
    Source: Citi Research

  • Ethiopia's sovereign ratings downgraded
    Fitch Ratings downgraded Ethiopia's long-term foreign currency issuer default rating from 'B' to ' CCC'. It attributed the downgrade to the government's announcement that it is planning to use the Group of 20 "Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative" (G20 CF), which raises the risk of a sovereign default. It expected Ethiopia's engagement with the G20 CF to cover official bilateral debt, and that the reprofiling of the latter will have a detrimental impact on overall debt sustainability. However, it pointed out that the terms of the G20 CF framework raise the risk that private sector creditors will also be negatively affected. It added that the debt's re-profiling will not involve debt write-offs or cancellation, and that it will include a combination of lowering coupon rates and extending grace periods and maturities. It considered that any change of terms for private-sector creditors, including the lowering of coupon rates or the extension of maturities, will consist of a sovereign default. Further, the agency indicated that Ethiopia's external finances are the main factor behind the authorities' decision to use the G20 CF. It said that persistent current account deficits, low foreign currency reserves and rising external debt repayments constitute risks to the sustainability of the external debt. It forecast Ethiopia's external financing requirements to average more than $5bn annually in the next two years, while it projected foreign currency reserves at about $3bn, or two months of current external payments in the covered period. It expected the current account deficit at about 4% of GDP in the fiscal year that ends in June 2021, and noted that narrower deficits have not eased the pressure on foreign currency reserves.
    Source: Fitch Ratings

  • GCC banks' asset quality to deteriorate in 2021-22 period
    Fitch Ratings considered that the deterioration in asset quality constitutes the main risk for banks operating in Gulf Cooperation Council (GCC) economies. It anticipated that the banks' asset quality metrics will weaken significantly in the 2021-22 period, once the coronavirus-related support measures expire. It said that the extension of loan deferral schemes and other support measures for borrowers in most GCC countries will delay but not prevent the recognition of problem loans in the second half of 2021. It noted that pressures on borrowers in the GCC could persist, despite the expected recovery in economic activity in 2021. It pointed out that banks in Kuwait and Saudi Arabia are the least vulnerable to rising asset quality risks, as they benefit from strong pre-pandemic credit fundamentals and from low levels of impaired loans. It added that the GCC banks' "front-loaded" provisions will limit additional impairment charges on banks. In parallel, the agency anticipated that the liquidity of GCC banks will be adequate in the 2021-22 period, supported by proceeds from sovereign debt issuances and by rising household savings. It noted that the pandemic did not trigger deposit withdrawals by governments or government-related entities, as authorities relied more on debt issuance than on asset drawdowns to fund their fiscal deficits. Moreover, it considered that the banks' capital buffers  are sufficient to absorb the anticipated deterioration in asset quality. It expected the average Common Equity Tier One ratio of GCC banks to decrease from 15.2% at the end of 2019 to 14.5% by end-2021, mainly due to weaker profitability metrics. It projected the gradual growth in lending and lower dividend payout ratios to ease the pressure on the banks' core capital ratios.
    Source: Fitch Ratings

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