GCC credit cycle at tipping point

Dubai - Weaker operating field beckons as govts cut spending due to lower oil

Corporate and infrastructure companies in the GCC face a weaker operating environment as governments reduce spending on the back of lower oil prices, which have more than halved since June 2014, Standard and Poor's ratings services said on Monday.
"Reflecting this weak economic climate, debt issuance by corporate and infrastructure companies has fallen by 58 per cent in the past 12 months to about $7 billion. This also reflects our view that the credit cycle has reached a potential tipping point, with higher pricing anticipated going forward," the ratings agency said in its latest analysis.
S&P said there are various factors that could tempt existing and new issuers to tap the capital markets over the coming year. These include the gradually declining availability of liquidity at the local banks, the opening up of markets to foreign investment - such as the Tadawul in Saudi Arabia, along with the Iranian market if the nuclear deal with the P5+1 progresses as expected - and the refinancing by government-related entities in 2016.
However, despite its forecast of a tougher pricing environment ahead, the ratings agency said it expects GCC issuers would have sufficient headroom within their financial profiles to withstand a stress scenario of a rate hike by the Fed, which is usually reflected in GCC central bank rates, of 150-200 basis points with a limited impact on their financial profiles in the short term.
It noted that energy subsidy cuts by Bahrain, Oman, and the UAE governments could increase financial pressures on downstream corporates in the region. "Governments are currently protecting large public sector investment budgets to support economic growth. Yet, the longer the oil price remains at current lows, the more likely these could be postponed or cut," said S&P credit analyst Karim Nassif.
World oil prices have dropped by more than 50 per cent since June 2014. S&P expects Brent crude oil prices to remain at about $50 per barrel for the time being, which would prompt governments to postpone or delay some projects.
The International Monetary Fund forecasts that the oil price dip would result in a $300 billion drop in revenues this year for the six GCC states. Globally, energy industry players had already cancelled $200 billion in investments over the past few months in the wake of the oil price plunge. A Barclays survey found that oil companies worldwide shed about 20 per cent of their capital budgets to $521 billion this year and will cut another three per cent to eight per cent from their investments next year, marking the first time since the mid-1980s that oil companies will reduce spending two years in a row.
S&P said the Dubai real estate market is also affected with residential prices projected to fall by between 10 per cent and 20 per cent this year. But it said it expected UAE property firms to withstand the correction.     
"We believe that the slowdown of economic growth across the UAE and the GCC will limit demand from non-residents and investors, while supply additions remain high. However, the real estate entities we rate are better armed and show sufficient headroom in their credit ratios to weather the current market correction," it added.
S&P said consequent to the oil price plunge it expects all GCC countries to report fiscal deficits in 2015 and to be under some pressure to consolidate their public finances. "This has resulted in several key developments. GCC sovereigns have begun to introduce fuel subsidy reforms. A fall in liquidity at GCC domestic banks because of reduced deposits from government and public sector deposits, as well as GREs linked to the oil and gas sectors. We now expect slightly lower credit, deposit, and economic growth in 2015, and although liquidity positions are still healthy, we see a less certain outlook for 2016," said the report.
- issacjohn@khaleejtimes.com