BEIRUT: Moody’s Investors Service released its mid-year update to its Middle East Sovereign Outlook, in which it noted that 2010 continues to be a year of improvement for Middle East sovereigns.

But the rating agency cautions that, similarly to other regions, the pace of economic recovery is uncertain and varied, and that the fragility of the global environment poses downside risks. The report was published by Bank Audi’s MENA Weekly Monitor.

Since Moody’s February Middle East Sovereign Outlook, the rating agency has implemented one further positive rating action in the region, specifically in Lebanon.

In April, Moody’s upgraded Lebanon’s sovereign ratings by one notch to “B1.” This followed upgrades of the sovereign ratings of Saudi Arabia to “Aa3” and Oman to “A1” in February.

According to Moody’s head analyst for Middle East sovereigns, buoyant oil prices and accumulated financial assets should enable most Gulf states to maintain a degree of fiscal stimulus in 2010. This should spur private activity despite still-weak consumer confidence and sluggish bank lending.

Moody’s notes the weaker public finances of the region’s oil importers have rendered them less able to maintain fiscal support.

Nevertheless, these countries’ banking sectors experienced less of a “credit shock” during the 2008-09 global crisis and their growth rates have been less volatile.

Although oil importers’ real GDP growth is expected to recover in 2010, it would remain weaker than pre-crisis levels and below the emerging market average, as per the rating agency.

Moody’s points out that the region’s two growth exceptions in 2010 remain Lebanon (on the upside) and Dubai (on the downside). In Lebanon, the economy has been thriving in spite of the fact that political tensions seem to be on the rise again, as per Moody’s, while that of Dubai continues to be weighed down by excessive leverage and a weak real-estate market.

Moody’s head analyst for Middle East sovereigns indicated that so far the volatility in European financial markets has not had a significant effect on the average cost of funding in the Middle East. He indicated that the countries with the highest trade exposure to Europe are Tunisia and Morocco.