"Among the regional oil producers, Qatar and Bahrain will achieve the highest rates of economic growth, because performance will be bolstered by heavy investment in the non-oil sector," said Standard & Poor's credit analyst Farouk Soussa. The two countries are investing heavily in the non-oil sector. Qatar will expand liquefied natural gas (LNG) production in 2007 and Bahrain will be ramping up its aluminium production capacity.

The report also states that the largest government deficits in the region lie outside sub-Saharan Africa, in Lebanon and Egypt. "Public finances suffer from high levels of public expenditures soaked up by servicing the large (albeit falling) public debt stock, by the civil service wage bill, and by high level of subsidies. A weak tax collection and large shadow economy exacerbate the problems."

Lebanon's large government deficit is blamed on an inefficient and costly state electricity company (EDC) and one of the heaviest public debt burdens among sovereigns — 55 per cent of government revenues are consumed in interest payments alone.  "The conflict with Israel in mid-2006 further damaged the fiscal situation, which is already burdened by the highest debt-to-GDP ratio in the region," states the report.

In Africa, Mozambique and Nigeria will record the highest growth rate, driven by mega-projects including gas, oil, and uranium exploration activities. In Mozambique, for example, there is the $240 million Moma titanium sands and smelter project.

In Nigeria, high oil prices are expected to sustain a strong expenditure, the bulk of which is being directed to improving the country's ailing infrastructure, states the report. "Fiscal-led growth is thus assured in the medium term, assuming elevated oil prices are sustained and the political environment remains conducive to economic and monetary stability."

For most sub-Saharan African sovereigns, low per capita incomes continue to act as a constraint on their sovereign ratings. Government revenue capacity in low-income countries tends to be curtailed, while expenditure pressures are considerable due to extraordinary social and infrastructure needs, the report points out.

Many non-oil sovereigns are also running large current account deficits, which are mostly offset by high levels of foreign direct investment (FDI), especially in the Seychelles and Jordan, Overall, however, foreign investment in the region is weak in comparison with other regions in the world, particularly in sub-Saharan Africa, where aside from Nigeria and Mozambique, net FDI is projected to average less than 1 per cent of GDP in 2007, concludes the report.

"This is most likely to be a reflection of these countries' relatively poor business climates, where legal uncertainties, bureaucracy, and limited economic opportunities currently deter potential investors," said Soussa.

He added: "As steady reform progress continues, however, underpinned by IMF programs and increasing macroeconomic stability, the chances that this will change in the future are beginning to increase."