Key Industry Trends
·
Corporate
and infrastructure companies in the Gulf Cooperation Council (GCC) face
a weaker operating environment at present
on the back of lower oil prices, which have more than halved since June
2014. Government expenditures, on which these companies largely depend,
are slowing as a result.
·
Reflecting
this weak economic climate, debt issuance by corporate and
infrastructure companies has fallen by 58% 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.
·
We
nevertheless see 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 (GREs) in 2016.
·
Ratings
on some companies with exposure to commodity markets have come under
pressure due to the lower oil prices. Similarly,
ratings on GREs connected to some sovereigns have been constrained. We
have lowered the ratings on Bahrain and Oman in 2015. The sovereign
ratings on Bahrain and Saudi Arabia remain on negative outlook.
·
The
Dubai real estate market is also going through a correction, with
residential prices expected to decline by about 10%-20%
during 2015. However, we think our ratings on UAE property developers
and property investment companies are cushioned enough to withstand the
current correction.
·
Despite
our expectation of a tougher pricing environment ahead, we expect GCC
issuers will 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 (bps) with a limited impact on their financial
profiles in the short term.
·
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.
