In recent weeks, headlines have been dominated by he heightened tensions across North Africa, with widespread displays of unrest in Tunisia and Egypt.
These two countries share several structural and institutional vulnerabilities – unemployment is high (especially among the young), food prices have increased significantly and both are ruled by regimes that are not wholly democratic.
This has provided fertile ground for discontent from liberals who view Western democracies as a model and for conservative Islamists opposed to the influence of the West.
More recently, a general frustration at the lack of economic opportunity has also fuelled protests.
The protests caused rating agency Moody’s to downgrade Egypt’s credit rating to Ba2 last week, while Standard & Poor’s downgraded the country to BB. Meanwhile, Fitch still rates the country at BB+.
Across the region, we have had very limited exposure to local-currency-denom-inated bonds or US dollar-denominated bonds issued by Egypt and no exposure to Tunisian debt.
The protests caused rating agency Moody’s to downgrade Egypt’s credit rating to Ba2 last week, while Standard & Poor’s downgraded the country to BB
However, we believe Egyptian bondholders are being suitably compensated for their risk as we do not foresee a default scenario, although the unrest could continue for some time.
At present, there are no signs from the authorities that bond payments are, or would be, in jeopardy. Given the potential impact on future borrowing of a default, this is a serious step for any government to take and is usually a last resort.
There is clearly a risk of contagion to other countries in the region, including Morocco. However, in Morocco’s case, we have been less concerned by the newsflow, given its relatively stable political situation.
This stability owes much to the popularity of its leader, King Mohammed VI. He is viewed as a reformer and has championed a number of social improvements. He is also a so-called commander of the faithful. In other words, many Moroccan muslims see him as their legitimate leader.
We believe it is unlikely the unrest will spread to Middle Eastern states such as Saudi Arabia, Qatar, United Arab Emirates or Bahrain. These are all regimes with low levels of democracy and high youth unemployment but there is a significant difference in the standard of living compared with their North African neighbours.
Indeed, the oil and gas revenues of these Middle Eastern states enable their governments to provide a financial cushion not available elsewhere.
As such, government finances are comfortable, given the current high oil prices.
Meanwhile, they are investing heavily in sovereign wealth funds with the aim of providing greater diversification of wealth in the longer term.
Nevertheless, vigilance remains key and it will be important to monitor the situation closely as events unfold.”
Brendan Murphy is co-manager the BNY Mellon global strategic bond fund