Rising debt maturities in the Gulf pose refinancing risks, says S&P
Source: Standard & Poor's Ratings Services , Author: Posted by BI-ME staff
Posted: Thu November 17, 2011 2:26 pm

UAE. Standard & Poor's Ratings Services said today that issuers in the Gulf Cooperation Council (GCC) countries face rising refinancing risks over the next three years because the amount of debt maturing in the region will increase significantly between 2012-2014.

Industry experts estimate bonds and sukuk of about US$25 billion will mature in 2012, rising to about US$35 billion in 2014.

Standard & Poor's believes the region is therefore entering a challenging loan and bond refinancing cycle, especially given the ongoing volatility in capital markets and fears that slowing global economic growth is already curbing corporate debt issuance and heightening refinancing risk in the region.
Below, we outline Standard & Poor's key expectations for credit quality for Gulf sovereigns, bank, corporate, and insurance sectors in 2012.

We anticipate that Gulf sovereigns will continue to benefit from high oil prices and increases in hydrocarbon production, which are bolstering government finances and external accounts. We expect that economic activity in 2011 will record its highest growth rate since the onset of the global financial crisis, supported by accelerated government spending and large-scale infrastructure investment.

Yet, in spite of generally solid headline figures, public finances in the region have deteriorated structurally. Partly in response to the Arab Spring, many governments in the region have increased spending on social transfers, wages, housing, and infrastructure.

As a result, the dependence on hydrocarbon revenues to finance such spending has increased, which is reflected in higher non-oil budget deficits and increased break-even oil prices. With the global economy weakening in 2012, we think the main channel of impact for the GCC will be through weaker demand for hydrocarbons and hence lower oil prices.


Among Gulf corporates, several companies have delayed issuances, which we believe could accentuate refinancing risks for these players. Of all the Gulf corporates that Standard & Poor's rates, only one (International Petroleum Investment Company) has tapped the capital markets over the past six months. Most turned instead to banks to meet their funding needs.  We have also seen less issuance in the rated GCC infrastructure and project finance sector.

Although we believe that financing needs remain sizable, particularly in the power and water sectors, issuers that could afford to wait have generally held back from tapping capital and bank markets, perhaps hoping for better pricing conditions at a later date.

We anticipate that Gulf governments will likely continue to prioritize projects in power, water, and hydrocarbons that they consider essential to the economies and growing populations of the regions, over other infrastructure sectors, such as transport and renewable energy.  Banks' implementation of the Basel III regulations also poses a medium- to long-term challenge for the bank financing of this asset class in the region, in our view.

Nonetheless, we note some renewed interest in Islamic financing of infrastructure companies and assets, exemplified by the Abu Dhabi National Energy Co.'s recent proposed Malaysian ringgit (MYR) 3.5 billion medium term sukuk note program.

We believe it remains to be seen whether the liquidity drain for long-term bank funding would be replaced by capital market issuance or whether the onus will fall on direct government funding for strategic companies and assets. We expect that this will only become clearer over the coming few quarters.

For Gulf banks, we do not expect any meaningful changes in either the overall lending appetite or lending pricing as a result of the new capital requirements under Basel III. We believe that banks will generally not need to increase their capitalization because their current capital levels are already significantly higher than the new Basel III requirements and the composition of bank capital in the GCC is generally of high quality. 

Among our recently revised Banking Industry Country Risk Assessments (BICRAs), we classify Bahrain's banking system in Group 6, which is the highest risk among the GCC countries, ahead of the United Arab Emirates (UAE; Group 5), Oman, Qatar, and Kuwait (Group 4) and Saudi Arabia (the strongest, in Group 2).

In the UAE, we expect to see continued deleveraging or a very limited growth scenario for the major Dubai banks in 2012. This is because these institutions are largely focusing on managing their existing exposures, owing to their pronounced asset quality issues.

Credit growth for the sector will be generated largely by the Abu Dhabi banks, in our view. The banking system's net external borrowings have fallen over the past few years and we believe the refinancing requirements of the local banks are largely manageable, particularly for Abu Dhabi institutions.

However, the banks now carry substantial amounts of restructured loans on their balance sheets and the performance of these will be an important factor in their future asset quality as well as their exposures to certain GRE names
We believe that credit growth will be very limited for Bahrain's banks in 2012. We anticipate that they will continue to focus on their funding and liquidity and asset quality very cautiously, given the political uncertainties.

Certain Kuwaiti banks are beginning to see early signs of stabilization of their asset quality. They have strengthened their capital levels over the past two years, and the local market funding conditions are more favorable. We expect to continue to witness a gradual improvement in Kuwaiti banks' operating environment in 2012.


Our stable outlook on the Gulf insurance sector applies to both the primary and reinsurance sectors, and reflects companies' generally strong capital adequacy, strong asset liquidity, and strong technical earnings. Although all of the GCC insurance markets are very competitive, we believe that the majority of primary insurers maintain favorable underwriting margins.

Investment earnings remain under pressure through global economic weakness and depressed interest rates. However, insurers in the GCC have large asset bases that are capable of generating positive cash flows, despite the asset value volatility inherent in equity and real estate investments. Typically, GCC insurers do not trade actively in equities or real estate, but instead hold such assets for investment yield purposes.

Earnings conditions are tougher for insurers that mainly write retail lines of business, predominantly medical and motor, than for insurers that focus on the higher value commercial lines.

Although the territories are very different, we see common factors across the rated GCC primary insurance markets. For example, most demonstrate strong capitalization and earnings, supported by robust liquidity, and we expect that these conditions will continue.



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