Gulf countries push further ahead in sovereign rating outlooks

Dubai Oil-rich Gulf countries are far ahead in credit ratings outlook compared to the other countries in the Middle and North Africa (Mena) and the gap is widening as the region is affected by political instability and rising oil prices, rating agency Standard & Poor's said yesterday.

"Oil-rich economies in the Gulf are increasingly pulling ahead of the region's other economies, on the back of continuously high oil prices," Standard & Poor's credit analyst Tommy Trask said.

The spread of sovereign ratings in the region across Standard & Poor's ratings scale has always been relatively wide and has become greater over time. There has always been a difference in the average rating of two broad groups within Mena sovereigns: those with a substantial hydrocarbon endowment and those without, the rating agency said in a report Monday.

"The high prices support ratings across a range of corporate and infrastructure sectors, including oil and gas up- and downstream as well as sectors relying indirectly on commodity-led growth such as trade," Trask said.

Impact of tourism

While high oil prices are widening the gap between Gulf oil exporters and the region's other economies, outside the oil sector, tourism and trade volumes have risen in the UAE, benefiting from the slackness in commercial and tourism hubs such as Bahrain and Egypt, where the Arab Spring protests have taken their political and economic toll.

Despite the relative advantage the Gulf countries have, S&P estimates that average GDP growth in most GCC economies will likely moderate in 2012 and 2013. The currently lower pace of expansion in oil production compared with 2011 rates and the low risk appetites of international investors, coupled with European banks' possible moves to reduce their exposure abroad could dampen GCC growth.

The ratings agency said the region in general and Dubai in particular has made significant progress in the restructuring of government-related entities (GREs) that piled up hefty debt in order to make foreign investments during the boom years.

"As regards Dubai-based issuers that we consider to be GREs under our methodology, we believe that the government has a clearer strategy and greater confidence on which GREs it should support with public funds," Trask said.

In S&P's opinion, market confidence in the Dubai government's ability to support remaining GREs in need has increased, given the track record of recent successful restructurings and the government's issue last week of a $1.25 billion (Dh4.59 billion) sukuk.

Access to credit

While the private sector credit growth is yet to pick up pace in the Gulf, analysts said banks have substantially expanded their credit lines to public sector entities. "Although the region's banks may be less inclined to grow their balance sheets, we think government-related entities continue to have good access to bank funding," Standard & Poor's credit analyst Karim Nassif said.

Although some of the regional banks have issued substantial amounts of long-term bonds in the first quarter of this year, the ratings agency said it believes that some of the region's banks are now less inclined to grow their balance sheets, given the uncertainty about access to wholesale funding and the potential direction of non-performing loans and loan provisioning.

Regional bond prices have remained highly volatile over the past six months, but bonds have been trading tighter in the past three months on general optimism in global financial markets. Consequently, more Gulf issuers are tapping the international capital markets to raise funds.

"We see the trend in rising capital market issuance as generally positive for credit quality since it has the potential to derisk balance sheets of issuers that have tended to rely heavily on short-term financing from local banks," Trask said.