Global Arab Network | CI: Syria sovereign credit characterised by commitment to economic reform

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CI: Syria sovereign credit characterised by commitment to economic reform

Tuesday, 07 September 2010 10:09

Syria's sovereign credit profile is characterised by comparatively strong solvency and liquidity indicators and a demonstrable commitment to gradual economic reform, said an international credit rating agency.

Capital Intelligence (CI) announced today that it has assigned Syria a long-term foreign currency rating of ‘BB-' (BB minus) and a short-term foreign currency rating of ‘B'. CI has also assigned Syria a long-term local currency rating of ‘BB' and a short-term local currency rating of ‘B'. The outlook on all ratings is Stable.

Syria's sovereign credit profile is characterised by comparatively strong solvency and liquidity indicators and a demonstrable commitment to gradual economic reform.

Less favourably, political risk is a more material concern compared to many higher rated sovereigns, the economic structure and institutional frameworks are relatively weak, and the financial system underdeveloped. In addition, the government is exposed to potentially significant contingent liabilities because of the dominant role of the state in the economy.

Syria also faces major longer-term risks associated with declining oil production and a fast growing workforce. The overarching strategy for overcoming these challenges is focused on completing the transition to a market-based and more open economy. But this will require many more years of sometimes difficult and politically-sensitive changes and hence there is a risk that the reform process might falter.

Syria's economy has been only moderately affected by the global economic downturn, mainly because of its limited linkages with the international financial system, and is well-placed to return to trend real output growth of about 5% in 2010-11 as its main trading partners recover. External vulnerability is currently low and Syria's capacity to absorb temporary external economic shocks appears to be strong. The public sector is a net external creditor, with official foreign assets estimated at USD17 billion at end-2009 against gross external debt of USD5.8 billion.

Gross government debt is moderate at an estimated 32% of GDP or 145% of budget revenue in 2009. However, this partly reflects the cancellation and rescheduling of substantial amounts of public external debt between 1995 and 2005. Fiscal consolidation, reasonably good GDP growth and low real effective yields on government debt (reflecting the availability of non-market financing) have contributed to favourable debt dynamics in the years since.

Further adjustment efforts are, nevertheless, required to safeguard the long-term viability of the public finances as oil production, which is the source of 20%-25% of budget revenue, is set to dwindle over the next 10-20 years. At the same time, population growth is likely to increase demands for higher spending on health and education, as well as basic infrastructure. The non-oil tax base is narrow and the government relies too much on the surpluses of public enterprises and capital spending restraint to keep what is already a large budget deficit under control.

Weaknesses in the country's economic structure are an important rating constraint and will need to be adequately addressed if the private sector is to become the primary driver of growth and job creation, capable of absorbing an expanding labour force which could otherwise become a source of social, political and fiscal pressure. The production base is relatively undiversified and the investment climate is comparatively poor, marred by high levels of state ownership and protection, bureaucracy and corruption, deficient legal and regulatory regimes, inadequate physical and technological infrastructure, and low levels of education and training.

Risks to political stability and policy predictability arise from the system of government, which is characterised by opaque decision-making structures and relatively weak, though improving, institutional and administrative capacity. Syria is also exposed to significant geopolitical risk, reflecting the comparative instability of the Middle East region.

Syria's ratings also take into account information risk stemming from limited disclosure of government debt and international reserves. There also appears to be little oversight or external audit by national bodies to support the reliability of the fiscal and other data that are released.

Syria's credit prospects depend upon the success of policy initiatives aimed at improving the investment climate, as well as on the implementation of further measures to strengthen the public finances and financial management. Substantial economic reform has taken place over the past decade and an accelerated pace of reform could lead to higher ratings over the medium term.

Global Arab Network

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