Mideast states credit rating to stay unaffected

LONDON A long war in Iraq could damage the creditworthiness of countries like Brazil, Jamaica and Turkey, who are highly dependent on overseas borrowing more than the credits of highly rated states in the Middle East, Standard & Poor's warned yesterday.


Published: Thu 13 Feb 2003, 2:47 AM

Last updated: Wed 1 Apr 2015, 8:23 PM

The rating agency said in a report that a war of limited duration would have little negative impact on current sovereign ratings but said a longer war could have an impact way beyond the conflict zone. 'Sovereigns that rely upon commercial cross-border debt to finance external borrowing requirements or that enter this period with an inappropriately loose fiscal stance may be far from the conflict but could have their creditworthiness hurt more than those nations closer to the fray,' said S&P analyst John Chambers.

Brazil is rated B-plus by S&P, Turkey is rated B-minus and Jamaica is rated B-plus, while among the Gulf states close to Iraq which are rated by S&P, Bahrain and Qatar are both rated A-, well inside the investment grade level.

Emerging market analysts at banks have been warning for a considerable period of time that countries which are dependent on external finance could have a tough time this year, even without a war, and that war would exacerbate risk aversion.

Many markets have sold off heavily as tension between the US and Iraq has mounted, but emerging markets have been relatively immune.

The risk premium for holding emerging market debt rather than safe-haven US Treasuries has actually fallen since November 8 when the UN Security Council approved resolution 1441 to 719 basis points (7.19 percentage points) from 854bp.

Investment analysts at major banks have long been positioning their recommended emerging market debt portfolios for war in Iraq and most recommend choosing Russia as a safe-haven.

Tulio Vera at Merrill Lynch said in his latest war strategy report that emerging debt markets were vulnerable because they had not sold off. He cut his recommendation to an underweight in Brazil and Ecuador market weight from overweight and remaining overweight cash and underweight Turkey.

Merrill raised allocations to safe-havens Bulgaria, South Africa and Chile and added to the overweight of Russia.

As well as those countries which need to borrow overseas, some countries could see their plans to tighten their budgets blown apart if there is a long war 'and ratings could suffer where reductions in budget deficits do not occur', S&P said.

These countries include Brazil, Israel, Lebanon, the Philippines and Turkey. Lower world growth could also hit some countries and worsen the fiscal accounts of many sovereigns. S&P warned that countries which already have a negative ratings outlook would be particularly at risk.

Analysts say that even countries close to any potential conflict which do not have big borrowing needs are unlikely to be damaged from a credit point of view.

Those would include Bahrain and Qatar and also the less highly rated Iran, although not Turkey which has big external financing requirements.

'The reaction you will see among Middle East bond markets is not going to be an indiscriminate event, nor will it work in simple concentric circles, based on how far a country is from the war,' said Marco Annunziata, Deutsche Bank's Chief Economist for emerging Europe, Middle East and Africa.

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