FT Syndication Service
LONDON: The growing threat of inflation could lead to rating downgrades in many Middle Eastern countries as price pressures from soaring commodity prices coupled with strong consumer demand destabilise these economies.
With inflation increasingly seen as a worldwide concern, the Middle East has been singled out as a region that may suffer heavily as many countries in the region are pegged to the dollar, restricting central banks from imposing tighter monetary conditions, Moody's warned recently.
Of the 11 countries Moody's rates in the Middle East, it said Egypt, Jordan, Lebanon, Morocco, Tunisia and Saudi Arabia faced the greatest danger of downgrades, although Oman, Qatar, the United Arab Emirates, Bahrain and Kuwait were also at risk.
Moody's said: "Fiscally constrained non-oil exporters with high inflation rates are potentially more sensitive to the indirect adverse effects of inflation. High rates of inflation are of particular concern in Egypt and Jordan given their social and fiscal vulnerabilities."
The ratings agency added: "The rise in inflationary pressures has stimulated a heated debate in many countries over the appropriateness of dollar exchange rate pegs, particularly in the Gulf countries.
"Given that Gulf governments find it politically difficult to trim fiscal expenditure at a time of booming oil revenues and that monetary policy is heavily constrained, unless there is a sharp rebound in the dollar, it is difficult to see how inflation will be effectively tamed without some adjustment in exchange rates."
Historically, there has been a strong correlation between the rate of inflation and the rating level, with higher-rated countries tending to have lower inflation.
The reason for this is because governments can find it difficult to maintain fiscal discipline during inflationary periods as workers demand higher salaries or welfare payments. High rates of inflation can also lead to political instability and jeopardise growth.
Inflation rates in the Middle East range from a high of 16.4 per cent in Egypt to a low of 3.7 per cent in Morocco.
