The Impact of War and Terrorism on Sovereign Risk in MENA Countries

The prolonged war in Iraq, the political turmoil in Lebanon, the heightened tension between the Israelis and the Palestinians, and the specter of an attack on Iran have all significantly shaken business uncertainty levels in several MENA countries. Sovereign risk – the credit risk assessment concerned with the obligations of central governments – is believed to have increased. In response, credit rating agencies like Moody’s and Standard and Poor’s have revised their ratings or placed specific countries on their watch list, a move which normally precedes a credit rating change. Using data from Morgan Stanley, Freedom House and the World Bank, we quantify and explain the variability of sovereign risk in 5 MENA countries and two control countries on specific dates between 2002 and 2006, around which a tragic event has taken place. Our methodology allows us to test how the heightened political tension in the Middle East has altered the risk profiles of these countries, and provides an additional valuation tool to traditional agency ratings.