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Standard & Poor's upbeat on Gulf region's corporate credit quality

Addressing a seminar in Dubai yesterday S&P analysts said the unprecedented oil revenues last year strengthened the balance sheets of governments across the Gulf states and the credit quality outlook for the region looks promising. The international rating agency yesterday unveiled a report; 'Oil And Gas Revenue Windfalls Boost Outlook For Corporate Credit Quality In the Gulf Region In 2006.'

“The region is investing heavily in new infrastructure and also in diversification of existing industries, with project financing in the Middle East totalling $44.3 billion in 2005,” said Standard & Poor's credit analyst, Jan Willem Plantagie. “Dubai is a prime example, with its huge investments in real estate and transport infrastructure. Furthermore, with strong sovereign support and expected ongoing high oil prices, the outlook for project finance ratings is positive.”

As for the financial sector, S&P had upgraded the ratings of seven banks in Kuwait and Saudi Arabia at the end of January 2006. “We expect the governments of these countries to provide extraordinary assistance to these banks in the event they encounter distress," said Standard & Poor's credit analyst Emmanuel Volland.

Commenting on the insurances sector in the region, S&P analyst for the sector said, the growth of the insurance market in the Middle East raises the question about whether new companies coming to market will be rated. In addition, Takaful insurance has grown in scale and significance.

“The outlook for the insurance market is very upbeat. Long recognised as one of the least developed regions in terms of insurance penetration, there is now greater awareness and acceptance of the social benefits of insurance.” said Kevin Willis, S&P's credit analyst.

The petrochemicals industry in the Gulf region is expected to continue to post double-digit growth in the medium term and as a result about 20 per cent of the world's ethylene production is expected to be located in the Middle East by 2010. Ethylene is the key building block for chemicals and mainly used to produce plastics. “Besides easy access to very competitively priced feedstock such as ethane and naphtha, the Middle East enjoys a favourable geographic position to serve the fast-growing Asian markets as well as the established European and North American markets,” said commented Standard & Poor's credit analyst Tobias Mock.

In its pursuit to diversify the local economies and capturing higher margins, S&P expect the region to emerge a leading player in the business of refined oil products. According to the International Energy Agency, investments needed in the region's oil and gas sector could be as much as $39 billion a year to ramp up oil production by 50 per cent to 36.8 million barrels per day (bpd) by 2020 from 24.7 million bpd in 2004, and almost triple gas production to 700 billion cubic metres (bcm) per year in 2020 from 260 bcm in 2003.

“We expect national oil companies to be the biggest investors in the region, and that more of them will be looking for long-term funding in their own name, via the capital markets and with the aid of credit ratings; long term corporate debt instruments will give these companies additional flexibility to fund their multi-year capital expenditure programmes for many years ahead,” said Mock.