BMI View: This quarter has seen an overall 0.5 point reduction in the average market risk rating for the Middle East and Africa, largely due to increased uncertainty over regulatory regimes caused by unrest in the region as well as price volatility and delays in capacity expansion. Political uncertainty also dented the overall country risk score, which declined 0.1 point.
The key findings from the Middle East Petrochemicals RRRs can be summarised as follows:
Hydrocarbons-rich markets in the Arabian Gulf will continue to feature at the top of our scoring matrix, due to their strong scores for petrochemicals capacity.
Egypt's score has come under pressure this quarter due to political uncertainty following the toppling of the elected president by the military, leading to a 1.0 point reduction in its score.
Regional leader Saudi Arabia saw 0.1 points shaved off its score due to higher costs, although some segments saw an improvement in prices.
Only Nigeria saw its score increase, albeit by a marginal amount, due to a slight improvement in its long-term external risk rating. However, it continues to languish in last place in the regional rankings with little prospect of improvement over the medium-term.
Aside from Saudi Arabia, other Arabian Gulf states have seen no movement in their scores this quarter with the challenges and opportunities unchanged. They remain competitive producers, although their export-orientation means they are exposed to the volatility of global markets. However, Kuwait and the UAE show promise of being more dynamic in the future, with plenty of scope for downstream diversification.
South Africa's score remains weighed down by ongoing labour disputes and electricity supply issues, which are undermining domestic manufacturing activity.
Delays continue to beset the Algerian petrochemicals industry, although the score may improve over the short-term if new capacity comes onstream in coming months.
Africa Coming Into View As Gulf States Mature
Major petrochemicals producers in the Arabian Gulf are approaching their full potential in basic chemicals production. As such, petrochemicals ratings in these markets are unlikely to improve much beyond current levels, although Iran's growing isolation in terms of both trade and investment risks delaying the completion of some projects. The main drive will be towards product diversification. Attention is turning to investments in Africa, where there is huge potential for competitively priced naphtha and ethane supply. However, the rate of capacity growth is unlikely to match demand due to domestic risk factors, notably the lack of infrastructure and often opaque regulatory environments. These structural risk factors will limit potential returns. African markets will remain crowded together at the bottom of the ratings table, with capacity expansion skewed towards urea and ammonia for domestic use and export.
Arab Spring Takes Its Toll
Political risk looms large in the region, particularly with the Arab Spring creating tension. Iran remains an anomaly in Gulf region because although it has the second largest petrochemicals capacity regionally, after Saudi Arabia, this is outweighed by its poor risk environment. In direct contrast, Israel's score remains robust due to its relatively open economy, in spite of the ongoing disputes in the West Bank, the flash points on its borders with Lebanon and Egypt and the lack of petrochemicals capacity. If the political situation changes, it will prompt our Country Risk analysts to intervene in risk ratings. This is partly reflected in the relatively low country risk scores for a number of countries such as Egypt and Algeria, a direct consequence of previous downgrades to our short-term stability and policy continuity indicators.
Regulatory Framework Dictates Risks
Capital constraints are a pertinent downside risk to our MEA ratings, particularly in Sub-Saharan Africa, where governments have not always been able to realise their ambitious capacity expansion plans due to lack of capital. Market risks will often be dictated by the relevant regulatory frameworks. Although key markets in the region have maintained relatively robust real GDP growth, the weak external economic climate, in addition to red-tape and funding difficulties, could contribute to project delays and/or cancellations.
Similarly, heterogeneous levels of liberalisation and competition in the regional petrochemicals industry play a major role in shaping our risks scores. As such, there is a 40.7-point differential between the top and bottom countries in our Middle East and Africa Petrochemicals table, with investors achieving a range of rewards at different levels of risk.
|Scores out of 100, with 100 the best. Source: BMI|
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