said today that although it expects that some corporates and infrastructure
issuers in the Gulf Cooperation Council (GCC) will likely feel the weight of
lower oil prices, most of its rated entities show resilient financials for
now, in an industry report card published today titled, “Some Gulf Corporates
Could Feel The Heat On Low Oil Prices.”
Corporate and infrastructure companies in the GCC face a weaker operating
environment at present on the back of lower oil prices. Prices of oil have
more than halved since June 2014, thereby slowing government expenditures, on
which these companies largely depend.
The drop in oil and gas prices triggered a 58% reduction in corporate and
infrastructure bond and sukuk issuances over the 12 months ended Aug. 31,
2015, compared with the previous 12 months. This declining issuance was partly
because of the tightening of budgets at key government-related entities (GREs)
that carry out important roles in infrastructure projects on behalf of their
respective governments. In some cases, limited government budgets prompted the
cancellation of infrastructure projects. With regard to entities exposed to
the oil and gas industry, a sharp reduction in capital expenditures is also
leading to lower issuance.
“We observe, however, that GCC governments continue to invest in large public
sector infrastructure projects. Still, the longer the oil price remains near
current low levels, the higher the likelihood of seeing more infrastructure
projects postponed or dropped,” said Standard & Poor’s credit analyst Karim
We nevertheless see various factors that could propel 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 following the nuclear deal with the P5+1), and the
refinancing by GREs in 2016.
Ratings on some companies with exposure to commodity markets have come under
pressure due to the lower oil prices. Similarly, ratings have been constrained
on key GREs with ratings connected to sovereigns. This year we have lowered
the ratings on Bahrain and on Oman. The sovereign ratings on Bahrain and Saudi
Arabia remain on negative outlook.
The Dubai real estate market is also suffering, with residential prices
expected to decline by about 10%-20% during 2015. However, we think our
ratings on property developers and property investment companies in the United
Arab Emirates (UAE) are cushioned enough to withstand the current correction.
Despite our expectation of a tougher pricing environment ahead, we believe a
potential U.S. Federal Reserve’s interest rate hike, even if it were to lead
to a 150 bps-200 bps increase for Gulf corporates (based on our stress
assumption), would not rock the creditworthiness of the entities we rate 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.