Youth unemployment and a lack of economic opportunities for young and growing populations is a key policy challenge and a risk to political and social stability in most sovereigns in the Middle East and North Africa outside of the Gulf Cooperation Council (MENA ex-GCC), Fitch Ratings says in a new report. According to the rating agency, the demographic challenge has grown since the Arab Spring protests (2010-2011). Already high unemployment rates in Iraq, Jordan and Morocco have risen further. Real GDP-per-capita growth has been lacklustre in all but Egypt and Morocco. Labour-force participation rates have fallen, in a trend that preceded the pandemic in Egypt, Morocco and Jordan. In the past decade, only Egypt has managed to reduce youth unemployment and increase GDP per capita, while containing government spending on wages and subsidies. Fitch said that demographics has a multi-faceted impact on sovereign ratings. High population growth rates support higher trend growth and thereby exert a downward force on government debt dynamics, as is the case in Egypt. However, failure of economic growth to outpace growth in the labour force can lead to rising unemployment and stagnant living standards, raising risks of social and political instability, as in Tunisia and, to a lesser extent, Iraq and Jordan. The need to contain social stability risks often leads to increased government spending on public-sector employment and subsidies, resulting in wider deficits and a more rigid spending structure, the report said. In Tunisia, this approach has somewhat contained youth unemployment over the past decade, but has culminated in politically intractable debt sustainability and financing challenges. Domestic social and political stability and security risks are a rating driver or rating sensitivity in all Fitch-rated sovereigns in MENA ex-GCC. They have also been a key driver or contributing factor to past rating actions. A degree of political risk is a persistent feature of Fitch’s ratings of regional sovereigns, said the report.