GCC credit cycle at potential tipping point amid low oil, says S&P

The amount of debt issued by GCC corporates over the past 12 months has dropped by 58 per cent.

Regional corporate debt issuance fell by more than half over the past year as an economic slowdown and lower oil price sapped credit demand.

Bond and sukuk issuance by GCC corporates fell 58 per cent to US$7bn over the 12 months to the end of August, Standard & Poor’s said.

Karim Nassif, lead S&P analyst, said that although the region’s debt markets could be ‘volatile’, local markets have reached “a tipping point”.

“The credit cycle was experiencing a boom in the last 3-4 years, pricing was very low and we expect that to change,” said Mr Nassif. “We expect upwards pressure on pricing going forward.”

S&P tracks about 40 GCC corporate entities and “five or six” of these have faced ratings actions over the past few months. These have been directly related to downgrades of the sovereign debts of Oman and Bahrain, and a more pessimistic outlook for Saudi Arabia.

S&P expects Brent crude oil prices to remain at about $50 per barrel for the time being, which it said will lead to governments postponing or delaying some projects, but Mr Nassif said essential infrastructure spending on areas such as power and water plants will continue.

“That’s stuff that has to take place,” he said. “Other than that, you look at the individual markets. In Dubai, ports and logistics activities are the bread and butter of the economy – they are essential to Dubai. Airlines you could argue are essential to Dubai, and to Qatar and its expansion strategy.”

Areas that may be subject to a rethink or postponement include some downstream petrochemical projects and transport schemes, said Mr Nassif.

This uncertainty is keeping some corporations and infrastructure firms away from capital markets, as they are less likely to need debt to fund major projects. However, this may change as the liquidity profile of some local banks weakens.

“It’s going to be important to see firstly whether this low [oil] price environment will continue to impact overall issuance, and secondly what is going to happen to the stuff that needs to get funded – the essential infrastructure.

“The essential infrastructure, we think, will still go ahead and there will be alternatives to the bank financing route that will be examined. So there could be also some capital market issuance because of that,” said Mr Nassif.

Property developers rated by S&P such as the UAE’s Aldar Properties, Emaar Properties and Damac Real Estate are all robust enough to withstand the likely 10 to 20 per cent decline in property values expected to occur this year, as well as potential interest rates hikes by the US government’s Federal Reserve.

Forecast population growth of 5 to 6 per cent for Dubai and 7 to 8 per cent for Abu Dhabi will continue to underpin real estate demand over the next five years, S&P said, even though supply levels have increased.

A recent report of the Saudi market by Samba Financial Group argued that despite having ample financial buffers Saudi authorities recognised that continuing double-digit increases on capital spending “would send the wrong message” to ratings agencies like S&P. It said that capital spending would be reined in.

“Anecdotal evidence suggests there has already been a weakening of the project flow, and we think this will become more apparent later this year and into 2016,” it said.

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