Egan-Jones Analyzes Concentration Risk Facing Middle East Economies

In a recent analysis, Egan-Jones Ratings Co. has shed light on the precarious concentration risks that Gulf sovereign states face due to their reliance on limited export routes, desalinated water, and imported food. The study elaborates on how a few critical assets underpin the economies of these nations and highlights the need for a more nuanced understanding of risk at the sovereign level.

One key illustration of the Gulf's vulnerability is highlighted by crude oil logistics. The closure of the Strait of Hormuz by Iran has significantly constrained approximately 20% of global crude oil and product supply. As a result, Saudi Arabia has had to redirect its oil shipments primarily through the port of Yanbu, which managed a staggering 92% of its seaborne crude exports in June. Following the Houthis' declaration of a maritime embargo against Saudi-linked shipping on July 20, there was a 56% drop in crossings at Bab el-Mandeb within a single week, halting almost all loadings on the west coast. This situation reveals the degree to which Gulf economies are exposed to geopolitical tensions.

The analysis also discusses alternative shipping routes which, while available, come with significant challenges. Cargo shipments heading towards Asia are now forced to navigate through the Suez Canal, adding a cumbersome thirty days to shipping times. This waterway had previously been shut down from 1967 to 1975, and in 2021, it was blocked for six days by a single stranded vessel, emphasizing the risks associated with reliance on this route. Furthermore, prospects for a pipeline connecting to the Mediterranean look bleak, as it would traverse politically unstable regions and could become a target for sabotage.

Water supply is another critical factor contributing to the concentration risk among Gulf states. Desalinated water currently accounts for between 70 to 99 percent of the drinking water in the six Gulf Cooperation Council (GCC) countries. The UAE, for example, holds reserves that are enough to meet only two days’ worth of normal demand. This precarious situation is underscored by the fact that there have been reports of damage to a desalination plant, and the GCC currently imports around 85% of its food, with more than 70% of those imports passing through the aforementioned Strait of Hormuz.

Population dynamics further complicate the landscape. Approximately 44% of Saudi Arabia's 35.3 million residents hold foreign passports, creating a fluid workforce that could potentially vacate the region in times of crisis—affecting construction schedules and broader economic activities. As such, these demographic shifts add another layer to the risks facing Gulf economies.

When discussing geopolitical tensions, Egan-Jones assesses the likelihood of major escalations as low. They suggest that a destructive campaign capable of significantly altering the status quo would likely precipitate a global economic depression. Ongoing diplomatic discussions are taking place; however, Egan-Jones remains skeptical about the potential for achieving any substantive results in the near term.

The commentary delivered by Egan-Jones serves as a vital framework for institutional investors and risk managers to consider their exposure to the region. Their analysis emphasizes that the principles of risk management, typically applied to individual counterparties or types of collateral, are equally applicable to sovereign risk assessment. With limited pipelines, ports, and infrastructure capable of handling most of the load, recognizing the vulnerabilities of these interconnected systems is imperative for informed investment decisions.

About Egan-Jones Ratings

Founded in 1995, Egan-Jones Ratings Co. operates as a nationally recognized statistical rating organization (NRSRO), providing timely and precise credit ratings as well as proxy services, helping clients navigate the complexities of financial markets.