According to a recent report by Standard & Poor's Ratings (S&P) on the impact of a war in Iraq on sovereign creditworthiness, governments that rely heavily upon commercial cross-border financing may be more at risk than rated sovereigns in the Middle East.
The article states that S&P's current 93 sovereign ratings include as a premise that a war with Iraq would be short and decisive. A longer war, however, would tilt the risk to the downside in key areas.
The rating agency believes that the current leadership of rated sovereigns in the Middle East can withstand economic and political shocks without losing the broad support of their populations for market-oriented programs, and that public protests, if they occur, would not seriously threaten the existing institutional frameworks. The most serious risk could stem from policy mistakes made under the stress of regional conflict and of policy paralysis in the face of civil dissent, which, in turn, could result in lower ratings.
A prolonged war would keep oil prices high, which, in turn, could lead to a global economic contraction. The fiscal accounts of many sovereigns would worsen, and trade and capital flows would fall. In such an environment, structural flaws in an economy may become more
pronounced. Sovereign ratings that currently have a negative outlook would be particularly at risk.
Several sovereigns, notably Israel, Lebanon and Turkey, enter this period of uncertainty with the declared aim of tightening their fiscal stance. However, the ability of governments to raise revenue and cut spending will diminish if a war is prolonged, and ratings could suffer where reductions in budget deficits do not occur.
Heightened uncertainty during a war would likely lead to increased risk aversion on the part of international banks and cross-border investors. Countries with large commercial external financing requirements would be at greater risk than those that do not rely upon confidence-sensitive capital flows.
A war of limited duration would have little negative impact on current sovereign ratings. However, according to sovereign analyst John Chambers, a more difficult war would be a greater challenge, one that will not necessarily lessen as the distance from Baghdad increases.
"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," Chambers concluded. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
