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UAE needs rigorous credit quality benchmarking

In an interview with Khaleej Times Cailleteau said the credit quality in the region is improving largely due to the huge liquidity arising from the oil windfall and the fast diversification of the local economies away from oil. However, he cautioned that there is urgent need for proper benchmarking and due diligence as the economies of all GCC countries are booming at an unprecedented scale, largely driven by the construction sector.

“Although there isn't anything alarming about the growth in the region, there are too many things happening too fast. Banks and financial institutions need to be sure about the quality of assets they are acquiring,” he said.

Moody's do not view the potential geopolitical tensions that could arise in the context of Iran's nuclear stand off with the US as a major threat to the region's booming projects sector or its credit quality. “A number of large infrastructure projects coming up in the UAE and the rest of GCC have government backing. The projects which are directly backed by governments in the region can get ratings equal to sovereign ratings. For example Qatar's Ras Laffan has equal rating as Qatar's sovereign rating,”

The large scale investment needs of the region, according to Cailleteau, is attracting a number of international banks and financial institutions to the region. “There has been a big increase in the exposure of international institutions in GCC-based projects and we anticipate this to increase in the decade ahead. As many of these institutions demand international standards in credit quality assessments, the region's standards in due diligence process will improve in the near future.”

Projects planned, or already under development, in the Gulf have crossed the $1 trillion mark, according to recent figures released by MEED projects. According to the latest reports the total value of projects has risen by more than $250 billion in the first three months of 2006. The projects market in the region is now estimated to be the biggest globally on a per capita basis, while the Middle East has the second largest share of project finance in the world.

The infrastructure boom is wide-spread across the whole of MENA region with the GCC countries leading the investment frenzy. With its huge investments in the energy sector, Qatar has emerged as the second largest issuer of project finance debt after China. Qatar issued $20 billion in project finance last year with $8.1 billion financing going to Ras Laffan expansion projects. Currently alone Qatar has projects in excess of $130 billion under way.

New projects in the GCC are expected to grow by up to 50 per cent in 2006. The number of projects in the region has been growing significantly primarily due to the economic boom driven by very favourable energy prices and the increasing role of the private sector in infrastructure development.

Although Moody's do not view any major fall in oil prices in the near future, the international credit rating agency believes that any project that has priced oil above $40 a barrel is rated risky and below investment grade.