Economic growth in the Middle East and North Africa (MENA) was strong in 2004, averaging 5% in real terms for the region as a whole, says a report issued by Standard & Poor’s Ratings Services.


The report, Standard & Poor’s first edition of its Sovereign Ratings in the Middle East and North Africa publication, notes that economic growth is expected to be sustained at similar levels in 2005, but this overall positive assessment for the region should not obscure the challenges MENA sovereigns face.


“The current strength of the global economy is clearly an opportunity for the governments in the region to make further progress on entrenching macroeconomic stability, strengthening fiscal prospects, and maintaining momentum on economic reforms,” says Standard & Poor’s credit analyst Konrad Reuss.


In particular, more highly leveraged countries such as Turkey (BB-/Stable/B) and Lebanon (B-/Stable/C) remain more vulnerable to market sentiment and changes in international capital flows than the other MENA countries.


In addition, for the oil-producing sovereigns in the region, the current positive conjuncture is a significant opportunity to demonstrate prudent policy choices offsetting the constraints on the ratings that their narrow economic structures would otherwise have. These choices are explored in the report in a stress test of sovereigns with a high degree of dependency on oil exports.


The report also includes a special focus on the rating criteria for ijara sukuk (lease-backed notes), which are one of many forms of sukuk compliant with sharia (Islamic law) on financial products and services. In recent years, Standard & Poor’s has rated several ijara sukuk transactions backed by various types of underlying credit lessees, including sovereign governments, regional governments, corporations, and multilateral lending institutions.
“In the medium term, the cyclical environment for the countries in the MENA region may become more challenging after several years of abundant international liquidity and high commodity prices,” says Reuss. “One lesson derived for sovereigns from past emerging-market downturns, however, is that a strong policy response that identifies and addresses sources of instability is vital for strengthening creditworthiness,” he concludes.


The report also incorporates summary analyses of all the 12 sovereigns in the MENA region that have been assigned ratings by Standard & Poor’s, and of the Islamic Development Bank (AAA/Stable/A-1+), the region’s flagship multilateral finance institution.