Banks in the Arab Mediterranean region will continue to encounter turbulent and challenging operating conditions in 2014-2015, according to a report published by Standard & Poor's (S&P) Ratings Services.Protracted regional political turmoil will hamper policy making and business confidence and delay economic recovery, the report said, adding that sovereign creditworthiness will likely remain the main driver behind bank ratings changes over the period.S&P believes that banks in the region are poised for recovery if political and geopolitical risks abate, because of the real economic growth potential of supportive demographics, educated workforces, increasing financial inclusion, and product sophistication.S&P said its ratings on Arab Mediterranean banks have been dragged down since the end of 2010 by the deteriorating creditworthiness of their respective sovereigns, especially given the concentration of government paper that banks carry on their balance sheets.The next 12 monthsLinks between sovereigns' and banks' creditworthiness will remain key rating drivers Sovereign creditworthiness has deteriorated sharply since 2010, especially public finance, and will remain fragile in the next twelve months.The report said that institutional and governance effectiveness is unlikely to improve over the next two years. Vulnerabilities at the sovereign level constrain government capacity to provide any kind of extraordinary support to banks in case of need.Domestic sovereign securities are the main instrument used for liquidity management, as in many countries with narrow economies and underdeveloped debt capital markets. Banks play a crucial role in bridging the financing needs of the government, and this role has increased as sovereign creditworthiness has deteriorated.“As the outlooks on our long-term ratings indicate, we are unlikely to upgrade any of the banks in the region over the next twelve months,” S&P said in the report.The role that the domestic banks play in supporting the local economy has also increased because of foreign investors' reduced appetite for the region's sovereign debt, while for domestic banks those investments carry attractive yields and zero-risk weighting under local regulations.S&P expects slow economic recovery and limited private sector credit growth. Only slow economic recovery in the region is seen over 2014-2015 because of the magnitude of ongoing political changes and uncertainties regarding the timing and outcome of elections in countries where they are due to take place.The political scene is fraught with uncertainties in Egypt, Tunisia, and Lebanon. Conflicts or severe internal tensions in neighbouring countries Syria, Libya, and Iraq also spill over into domestic economic prospects.Economic momentum is also dependent on the improvement of economic conditions in Europe , the region's main trading partner. “We do not forecast a recession in 2014-2015 in any of the five countries where we rate banks, though real GDP growth will remain below potential and pre-crisis levels,” the S&P report said. “Accordingly, we believe commercial lending opportunities for local banks will remain limited.”In Morocco, lending growth has slowed since 2012 as a result of banks' more conservative underwriting standards, weaker economic growth, and funding constraints. Morocco's economy depends largely on Europe, and weak economic conditions there continue to dampen credit demand. Retail loan growth remains resilient, however, and Moroccan banks' mortgage loan portfolios, which account for about 20 per cent of loans, continue to expand as demand remains high in the middle-income segment. Nominal domestic loan growth of around 3 per cent-5 per cent is seen in 2014, the report said.In Egypt, credit growth is supported by continuously growing customer deposit gatherings and improving retail banking penetration from a low level. In the absence of dynamic domestic private sector credit demand, crowding out of the private sector appears limited, a situation which is not sustainable in the long run.In Jordan, we expect credit to the private sector to slowly grow back to about 75 per cent-77 per cent of GDP by 2015. Government financing needs led to a reduction of this ratio to 73 per cent in 2013, from about 97 per cent in 2007. S&P expects general trade and lending to the construction sector to take a backseat amid the uncertain geopolitical environment. However, retail, mortgages, and other productive sectors, such as public services, energy, and utilities, will be the main growth drivers.In Lebanon, political turmoil will keep nominal growth of credit to the private sector at about 10 per cent over 2014-2015, primarily owing to trade and services, internal consumption, and real estate-related lending. Construction and housing loans together accounted for a high 33.5 per cent of loans as of Dec. 31, 2013. Housing loans--largely in Lebanese pounds--have surged significantly since 2008, owing to the subsidised lending programmes set up by the central bank.In Tunisia, loan growth will not only depend on the economic and political environments but also on the continued liquidity support extended by the Central Bank of Tunisia to the system.  “The total amount of liquidity injected in the system reached around TND 5.4 billion ($3.13 billion) at the end of July, and our base case scenario assumes no major withdrawal of this support over the next twelve months,” the report said.