S&P: Some Gulf corporates will likely feel heat of lower oil prices
Standard & Poor's
 PRESS RELEASE: DUBAI (Standard & Poor’s):Standard & Poor’s Ratings Services

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.

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