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Looking forward to 2003, the main risk for sovereign ratings is that possible war with Iraq could have an adverse impact on the political stability in the region, could raise the risk aversion of investors, or deepen the external imbalances in the US economy that would affect those weaker countries reliant upon global capital flows, a report released by Standard & Poor’s Ratings Service claims.

The possible war in Iraq will challenge policy makers in the Gulf States, Jordan, Israel, Turkey, and North Africa. Some countries may experience civil dissent. Those in close proximity to Iraq may suffer collateral war damage. Confidence will fall and the costs of capital will increase. Israel and many Arab countries will experience private capital outflows. For those sovereigns rated in the investment-grade categories, the improvements over the past decade in their external positions should serve them well. Nonetheless, a

  • US invasion of Iraq would tilt the risk to the region’s credit standing to the downside.


However, the report did stress that Standard & Poor’s view is that a sovereign’s credit standing improves or deteriorates as a result of decisions taken by policymakers, usually over several years. Exogenous factors can alter policymakers’ degrees of freedom and test their capacity to respond. However, in and of themselves, these factors usually do not materially undermine or enhance a sovereign’s ability-and even less its willingness-to service its debt.

“While most sovereigns in the Latin American and Caribbean region saw their credit quality decline in 2002, and few are expected to improve in 2003, for Asia, rating actions in 2003 will center on those governments that succeed or fail on structural and fiscal matters,” John Chambers, a managing director in Standard & Poor’s Sovereign Ratings group, says.