GREs in GCC can withstand low oil prices

dubai - Large GREs with important mandates in the oil and gas, utilities and telecom sectors can adapt to new market realities

Large government-related entities, or GREs, in the GCC with important mandates are better-positioned to withstand low oil prices, S&P Global Ratings said.

With the structural shift in the energy markets now well and truly established, GCC governments are on a path to addressing the fiscal deficits through various forms of expenditure reform, the ratings agency said in a report on Sunday.

"This will have both direct [higher taxation and subsidy reform] and indirect [weaker economic growth and demand for goods and services] implications for practically all our issuers in the region," said S&P Global Ratings credit analyst Karim Nassif.

In 2016, S&P already downgraded eight corporate and infrastructure GREs on the back of sovereign rating actions, and took negative rating actions on five companies that are directly exposed to the hydrocarbon industry.

"As we look forward, corporate and infrastructure companies most able to operate successfully and deal with the implications of the reform agenda [higher taxes, lower subsidies] will be best able to wade out the transformational market changes that are occurring," the S&P analyst said.

Who will survive?
The report pointed out that these companies are likely to be the large GREs with important mandates in the oil and gas, utilities and telecom sectors, as well as private corporate and infrastructure companies that are leaders in their respective fields, have adopted conservative funding strategies, and are not dependent on subsidies and government hand-outs for their operations.

"We have not yet seen a trend for governments to prompt their GREs to lever up to increase shareholder distribution, and this has been a key underpinning to rating performance," said Nassif.

Sectors that have been hit the hardest so far include the private sector oil and gas and construction industries, that are faced by lower investment, project delays and retendering, margin pressure and delays in customer payments.

"The fact that about two-thirds of our rated corporate and infrastructure ratings are GREs explains the dominance of stable rating outlooks despite the economic headwinds," said the report.

S&P's updated economic projections for the GCC reflect aggregate GDP growth of about two per cent for 2016 and 2017, similar to growth levels in 2015. "We assume Brent crude will average $45 per barrel in 2017, $50 in 2018, and $55 for 2019 and beyond," said the ratings agency.

In a depressed oil price scenario, the GCC region is witnessing a boom in debt issues by sovereigns. So far in 2016, Saudi Arabia issued $10 billion via a syndicated loan from international lenders, while Abu Dhabi issued $5 billion and Qatar $9 billion in the capital markets. S&P expects more issuance this quarter and next.

"To be clear, we remain sceptical that the Opec will be able to finalise a game-changing deal at its November meeting and expect both Brent [currently $53 per barrel] and WTI [$51] to end this year back at around $45. The Opec's compliance with output quotas has usually been poor and Russia may not prove to be a reliable partner. In the meantime, the recovery in oil prices is already encouraging a revival in drilling activity in the US. Nonetheless, oil prices will probably recover a little further next year [our end-2017 forecast is $60] as the market continues to rebalance."

- issacjohn@khaleejtimes.com