Middle East and North Africa: Country Risk Ratings

Algeria (DZA)
Algeria’s overall risk remains medium-high. Anticipation of presidential elections in December 2024 adds uncertainty, as the incumbent, President Abdelmadjid Tebboune, has not confirmed his reelection bid, though analysts speculate on his candidacy. Tebboune‘s administration has implemented popular policies, contributing to enhanced government and political stability. However, ongoing tensions with Morocco, Mali, and the UAE, coupled with the predicted electoral turmoil, positions the political violence risk as high. In spite of procurement reforms to tackle corruption, the government led by Tebboune has not been free of controversies, with the former ministers of Industry and Privatization and Investment Promotion facing corruption charges. Lengthy bureaucracy, complicated customs procedures, and an inconsistent regulatory environment make both the legal and regulatory and the political interference high risks – while the latter also influenced by an approved new media law that is alleged to tighten control over the work of journalists and imposes new restrictions. Consistent with this context, the risk of doing business is high. There are, however, other contributing factors to this assessment. Firstly, Russia and Algeria have come to an agreement to expand the involvement of Russian firms in the African nation, potentially posing a dilemma for new investments from Western firms. Secondly, competition is intensifying, given the robust presence of Chinese and Turkish companies. Thirdly, inherent structural issues, including black markets and bureaucratic hurdles, present considerable challenges for business operations. On the upside, the imports substitution policy adopted by Algeria has been partly reversed as authorities have started issuing licenses to importers of several products – mostly those affected by shortages. Within the economic domain, the IMF expects Algeria to grow 3.1% and 2.5% in 2024 and 2025, respectively. In particular, nonhydrocarbon GDP growth is expected to offset the decline in oil production. As the country enters the electoral year, there is a planned increase in spending by 11% throughout 2024. This allocation will prioritize defense, state salaries, and affordable housing. As a result, it is anticipated that the fiscal deficit will widen, and the risk associated with the government's inability to provide stimulus has increased from medium-low to medium. In a similar vein, the Fund anticipates an escalation in the country's general government gross debt, projecting an increase from 58.8% in 2024 to 63.9% in 2025. This surge is partially attributed to a reversal of the progress made in 2022 and is further exacerbated by the upward trends in the budgets for both 2023 and 2024. Hence, the sovereign non-payment increased from medium to medium-high. Additional concerns arise because financing needs might increase in the medium term resulting in wider fiscal deficits. This poses a threat to the financial sector, given the overreliance from the government to be financed by state-owned institutions. As a result, the banking sector vulnerability is medium. Lastly, the exchange transfer is a medium-high risk. While the country enjoys of solid reserves levels and maintains a current account surplus (largely supported by hydrocarbon exports), Algeria remains relatively close to external capital flows.

Egypt (EGY)
Egypt overall country risk rating remains at high, with the key near-term issues being the war in Gaza and the economy.  The re-election of president Sisi in December has been followed by measures to reduce the budget deficit, but scarce FX reserves; an exchange rate already 30% overvalued and the prospect of 30% inflation in 2024 are severe challenges.  The government also want to increase the USD 3 bln loan from the IMF.  The strategy will likely involve gradual devaluation over the next two years to avoid boosting inflation too much or causing popular protests against inflation.  The latter is one of the reasons that the political violence measure is at very high.  However, the economic fallout of the war in Gaza is to reduce tourism revenue by around 20%.  Though the war may only last a few more months, the instability in Gaza will likely impact Egypt tourism throughout 2024.  This means growth will likely undershoot the IMF 3.6% forecast for 2024, the current account deficit will be wider than 2.4% of GDP and budget deficit progress will likely be worse than expected.  This also means that the risk of external debt restructuring remains high in 2024 and more so in 2025.  This keeps the risk of sovereign non-payment medium-high and the inability of the government to provide fiscal stimulus at medium-high.  Combined with the low levels of FX reserves this also keeps the exchange transfer risk at medium-high.  In terms of Gaza geopolitics, President Sisi approach has been to pressure rather than confront Israel and ensure that Palestine citizens stay in Gaza to increase post war pressure for a two state solution. This has been popular in Egypt in the last few months and will likely remain the government’s stance through 2024.  

Iran (IRN)
Iran has a very high overall risk level. Although political violence is high, it is not very high rated as other countries in the region. The risk of unrest remains very high, similar to the political interference, and legal and regulatory risks, which also remains very high. Tensions with Western block remain high, particularly with the U.S., ignited by the recent war between Israel and Hamas in Gaza. It appears the tension recently surged to another level as the U.S. government announce on Jan. 11 that the Iranian navy had seized an oil tanker in the Gulf of Oman, as the tanker was previously involved in a Washington-Tehran dispute over carrying U.S.-sanctioned crude. As the war between Israel and Iran backed Hamas continues, Iran has not been directly drawn in the conflict so far. Instead, Israel resumes to attack Iran military advisors in Syria while a recent attack in late December 2023 has killed a senior general with Iran's Revolutionary Guards, according to the Iranian military forces. This could produce counterattacks to Israel and also raise tensions between Israel and Iran further but Iran’s direct involvement in Israel-Hamas dispute in Palestine remain unlikely. Iran’s very high overall risk rating also reflects sovereign non-payment risk measure moving from high to very high and inability of the government to provide stimulus moved to medium-high as the political inference on all aspects of people’s lives remain very high to monitor discontent. On the economic front, Iranian economy struggles due to sanctions and geopolitical tensions. Annual inflation rate rose by 39.2% in November of 2023, compared to the same month of 2022. Official figures from the Statistics Center of Iran (SCI) and the Central Bank indicate an annual inflation rate of 45.5% while experts caution that these numbers may be underreported. Ongoing economic crisis continues to fuel anti-regime protests and workers' strikes since 2017 while economic challenges are perceived as a significant factor behind the discontent. Despite macroeconomic problems, Iran's GDP grew 4.7% in the first half of the current Iranian calendar year (March 21 – September 22) compared to the same period last year, according to the Central Bank of Iran (CBI), highlighting country’s potential. On the political front, Sunni Muslim Arab allies Saudi Arabia and Egypt are nominally maintaining better relations with Iran despite differences, as parties restored diplomatic ties last April while Israel-Hamas war is testing the sincerity of these rapprochement. Reestablishing relations is largely a de-escalation rather than a larger swing to close relations with other Arab nations.  Iran will not want to dilute its military strength on the de-escalation alone.  Additionally, the U.S. presidential elections in November 2024 will be important for Iran’s future relations with the Western block.  

Kuwait (KWT)
Kuwait overall risk rating remains at medium.  A new prime minister has been appointed in January 2024 (Sheikh Mohammad Sabah al-Salem al-Sabah), with a focus of encouraging economic development given the structural diversification being pursued aggressively by Saudi Arabia and UAE.  This comes after the new Emir has taken power (Sheikh Mishal Al Ahmad Al Sabah).  However, the main issue remains the power struggle between the ruling Al Sabah family and parts of the judicial and legislative branches due to disagreements over debts, stateless people and redrawing of electoral boundaries.  This triggered the events that led up to the June 2023 election and likely see the Kuwait ruler, at some stage, pressing for a fourth election to try to end the power struggle.  This is an unfriendly business environment and helps explain why the risk of doing business (medium-high) and political inference (medium-high) are higher than other GCC countries.  The political violence measure remains at medium, with no current signs suggesting that the ongoing power struggle could escalate into a more volatile situation.  The support for the overall risk rating comes from oil exports helping government revenues and a current account surplus around 27% of GDP for 2024.  This windfall from the rebound in oil prices since the 2020 lows means that sovereign non-payment is medium-low, while banking sector vulnerabilities are also medium-low.  

Morocco (MAR)
Morocco’s overall risk level remains medium. The billionaire and successful businessman Aziz Akhannouch remains prime minister of the country after being elected in September 2021. Political violence and legal & regulatory risk remain medium high and political interference remains medium. Protests continue to occur in the country in solidarity with the Palestinians. The country is also still trying to recover from the horrifying earthquake that struck on September 8 2023, that resulted of over 2900 people being killed and 5500 injured. The Moroccan government received criticism over how it managed the disaster, such as the fact that it allowed assistance only from specific countries and denied others, such as France and the United States. The government afterward announced that all aid is welcome, but it should come through the appropriate channels, so that the rebuilding process is as efficient as possible. Supply chain disruption remains medium. Morocco is expected to report a growth of 2.4% in 2023 and 3.6% in 2024 according to the IMF. Morocco has reported a record FDI inflow, during the period January to August 2023, of USD33.98 bln, while the previous annual record was USD15.78 bln. Chinese companies, particularly from the electric vehicle sector have decided to invest in Morocco, with Chinese batter maker Gotion High-Tech agreeing with the Moroccan government to create the first African gigafactory in the country. Inflation is projected to be 6.3% in 2023 and expected to drop to 3.5% in 2024. The Moroccan central bank has increased the key interest rate by 1.6%, since October 2022, from 1.4% to 3.0%, to fight inflation. Morocco’s current account deficit has been projected to be -3.1% in 2023 and -3.2% in 2024.  Sovereign non-payment remains medium high, as exchange transfer decreases from medium high to medium. The domestic currency, the Moroccan Dirham is pegged to the international currency market at a percentage of 60% to the euro and 40% to the US dollar and has managed to appreciate against both currencies the past year. The risk of doing business, as well as banking sector vulnerability remain medium low, with the inability of government to provide stimulus remaining medium – government debt/GDP is projected to be 69% in 2024, which is elevated but manageable.

Saudi Arabia (SAU)
The overall risk rating remains medium. The risk of political violence decreased to medium-high and political interference risk scaled down to medium when compared to the previous risk analysis period. Despite adverse impacts of the war between Israel and Hamas, Saudi Arabia turned a new page with Iran and Turkiye in 2023, maintaining closer diplomatic relations while the war is testing the sincerity of these rapprochement. It appears Saudi Arabia’s relations with Israel will stay complicated in the near future as the country officials recently stated that the country will normalize relations with Israel only if there is a two-state solution between the Israelis and Palestinians. On the economic front, the economy continues to remain contingent upon the revenues from fossil fuels, as the shipments of oil account for 87% of total exports and for 46% of GDP. The economy shrank in 2023, as GDP contracted by 3.2% on quarter in Q3 of 2023, following a 0.5% fall in the previous quarter. The annual inflation rate in Saudi Arabia edged higher to 1.7% in November 2023 from the previous month's figures. Despite growing economic concerns, centered around the oil market, the path of U.S. monetary policy, the conflict in Gaza, and the effects of domestic reforms, the government remains highly committed to the 2030 program vision, which provides dual support through infrastructure spending but also a desire to reform.  Saudi Arabia launched a new residency program on Jan. 11 aimed at attracting skilled professionals and investment as the country forges ahead with its plan to pivot its economy away from fossil fuels. The financial and economic strength keeps the sovereign non-payment risk at medium.  The only medium-high risk rating comes from the political violence measure, as domestic discontent remains about differences in income inequality; the provision of services by the government and political and human rights freedoms. Additionally, the ongoing war in Yemen also provides a risk of spilling into occasional attacks on Saudi Arabia.  

Turkiye (TUR)
Turkiye’s overall risk level is at high. The local elections in March 2024 is causing the government to increase spending as the ruling party AKP wants to “win” the big cities back, which is likely to lead to severe political violence (currently very high), and a deterioration in legal and regulatory risk, which is at medium-high. Beside the elections, Turkish economy continues to struggle due to high inflation, increasing trade and budget deficits, and weakening Turkish Lira (TRY). Turkiye continues to receive help by a government debt/GDP trajectory which is still at manageable levels, but the current account is deteriorating, as imports growing faster than exports, and foreign direct investment inflows remaining weaker than expected. The recent return towards the traditional economic policy making is maintained in the second half of 2023, as the Central Bank of Turkiye hiked the policy rate from 8.5% to 42.5%, and strongly hinted at a determination for further monetary tightening to cool down the economy and squeeze inflation lower. However, the risk of doing business in Turkiye remains at medium level as political interference continues to be at medium-high level while supply chain disruption risk is also at high level. The good news is that the banking sector vulnerability is at medium low level showing the relative strength of the banking system. We think %49 hike in monthly minimum wage on December 28, and 50% hike in wages of civil servants will push prices further up and won’t help inflation in early 2024. We feel upside risks such as weakening currency, elevated upward pressures in services, and hike in public spending before the 2024 local elections remain strong, which will likely drive the inflation in 1H of 2024, as the impacts of the strong monetary tightening are still feeding through. On the political front, the conflicts in the region continue to affect the Turkish economy negatively as relations with the West are not at its best. The war between Israel and Hamas in Gaza ensuring that Middle East tensions remain elevated in the near term is not good news for Turkiye, as the country has good economic relations both with Israel and Palestine.

UAE (ARE)
The country remains at medium-low overall risk.  UAE has a low government debt/GDP, which means that the inability of the government to provide fiscal stimulus is at a low rating.  Combined with a 7-8% C/A surplus in 2024, this means that that sovereign non-payment risk remains at medium-low and exchange transfer also at medium-low. With plenty of fiscal space to support the 2030 ambitions, the non-oil sector is contributing as well, with 4% growth projected in 2024. The risk of doing business remains medium-low, as the government continues to encourage foreign companies to use the UAE as a regional base with a favorable attitude towards businesses.  This also means that the political inference measure remains at medium-low compared to medium for Saudi Arabia (that is pressuring companies to set up regional headquarters in Saudi).  Competition with Saudi Arabia is increasing, but wider security goals in the region mean that Saudi Arabia and UAE are aligned in key areas. In terms of the Hamas/Israel war, the UAE continues to take the stance that economic and politics are different.  This needs to be watched closely however, depending on what happens in Gaza and the wider Middle East in 2024.   

West Bank/Gaza (PSE)
The war in Gaza will likely drag onto the spring, when Hamas military capacity will be structurally broken though perhaps not eliminated.  Attention will then switch to the post war environment where Israel’s initial ideas focus on a continued Israeli military presence; no settlers and a multinational rebuilding fund.  What is unclear is who would have political control, which could slow or stop the rebuilding and recovery process.  The West Bank has also seen an outbreak of violence on both sides, which will likely sour the relationship between Israel and Palestinian authority that partially governs the West Bank.  Moreover, though the EU will back an Arab/EM push for a post war two state initiative and the formation of a Palestinian state, the U.S. will not want to make any commitments until after the November 2024 elections.  In 2025, U.S. opposition to the two state idea could continue, which would deflect pressure on Israel – domestic Israel politics argue it could be years before this is accepted by an Israeli government.  All of this means that the Q3 2023 overall country risk rating at high could worsen in the coming quarters, given the surge in political violence; collapse of Gaza economy; political flux in Gaza and West Bank and difficulty of managing the West bank economy and finances.      

Yemen (YEM)
Yemen remains at a very-high overall risk. Houthi rebels are attacking some ships in the Red Sea as a sign of solidarity with Gaza, but this has stalled a Saudi led peace deal.  This deal is designed to bring peace, partially by funneling oil revenues from the south to the north, where Houthi rebels are based.  With the U.S. military starting to take countermeasures in the Red Sea, the peace deal will be delayed and could be derailed.  The political violence measure remain at a very high risk rating, both due to Red Sea problems and the long-running civil war between the Saudi-backed government in the south and the Iran-backed Houthi rebels in the north. Growth will likely be positive in 2024 after last year’s recession, but macroeconomic instability remains with the prospect of 20% inflation in 2024. The unresolved conflict also damages the sovereign non-payment risk, still a high risk, while is not helped by the large fiscal and current-account deficits. Exchange transfer is also a high risk, owing to the same poor inflows and wide current-account deficit. The inability of the government to provide stimulus also remains a high risk. Legal & regulatory risk and the risk of doing business are both very-high risks, due to Yemen’s business climate of bureaucracy, corruption and weak infrastructure.