Dubai: In the context of the structural changes in the oil market, government finances in the GCC (Gulf Cooperation Council) countries have come under stress resulting in reforms addressing the fiscal deficits through various forms of expenditure reforms.
Although these changes have impacted the overall credit quality of GCC’s GREs (government-related entities), the relatively larger ones are better positioned to withstand the impact of low oil prices on their ratings, according to Standard & Poor’s.
“This [the structural shift in energy markets] will have both direct (e.g. higher taxation and subsidy reform) and indirect (weaker economic growth and demand for goods and services) implications for practically all our issuers in the region,” said S&P Global Ratings credit analyst Karim Nassif.
In 2016, S&P downgraded eight corporate and infrastructure GREs on the back of sovereign rating actions, and took negative rating actions on five companies that are directly exposed to the hydrocarbon industry.
“As we look forward, corporate and infrastructure companies most able to operate successfully and deal with the implications of the reform agenda (higher taxes, lower subsidies) will be best able to wade out the transformational market changes that are occurring,” said Nassif.
More issuance
The oil price decline has fuelled a plethora of debt issues by GCC sovereigns. So far in 2016, Saudi Arabia issued $10 billion via a syndicated loan from international lenders, with Abu Dhabi issued $5 billion and Qatar $9 billion in the capital markets. S&P expects more issuance this quarter and next.
“In our view, these large issues may have acted to constrain somewhat issues by both GREs and private corporations and projects. GREs and private corporations and projects are facing less pressing refinancing needs at present, after deleveraging and terming out debt maturity profiles in 2011-2014, when bank markets in particular were more liquid than today,” Nassif said.
Funding needs of these entities are somewhat tamed in the context of cancellation or deferrals of a few projects amid government attempts to control expenditures and address fiscal challenges.
Large GREs with important mandates in the oil & gas, utilities, and telecom sectors, for instance, as well as private corporate and infrastructure companies that are leaders in their respective fields, have adopted conservative funding strategies, and are not dependent on subsidies and government handouts for their operations.
Attractive option
More importantly, despite liquidity tightening, GCC banks have not fully repriced corporate loans. Low-priced bank debt also continues to be an attractive option for issuers in the GCC, constraining capital market issuance. According to various market sources, loans as a proportion of total GCC corporate and infrastructure funding (including loans and bond issuance) had increased to represent about 90 per cent of total funding for the first eight months of 2016, from about 74 per cent in 2013.
Analysts in general say there have been no pressure on GREs to seek market funding from their respective governments and that has kept them away from capital markets.
While large GREs including utilities are relatively better off in terms of credit ratings, the private sector oil & gas and construction industries, that are faced by lower investment, project delays and retendering, margin pressure and delays in customer payments face rating pressures. “The fact that about two-thirds of our rated corporate and infrastructure ratings are GREs explains the dominance of stable rating outlooks despite the economic headwinds,” Nassif said.
