S&P Report says decreasing oil prices will test GCC corporate and infrastructure issuers' resilience

Oil price declines could dampen economic growth in the Gulf Cooperation Council countries and weaken operating conditions in the corporate and infrastructure sectors, said Standard & Poor's Ratings Services in a report published today, Lower Oil Prices Will Test GCC Corporate And Infrastructure Issuers' Resilience, on RatingsDirect.

“We foresee the following key industry trends in the Gulf region:
 

• Standard & Poor's recently revised its Brent crude oil price assumption to $85 per barrel (bbl) for the remainder of 2014 and $90/bbl for 2015 and beyond. The Brent price was $83/bbl at the time of publication.

• The lower oil price could slow economic growth for the Gulf Cooperation Council (GCC) and weaken the operating environment for the corporate and infrastructure sectors. A prolonged period of lower government revenue given GCC governments' high infrastructure spending plans may push up sovereign and government-related entity capital market issuance and place a greater onus on the private sector to fund investments.

• Lower government revenues may also result in increased government efforts to tackle energy subsidy reform. This, in turn, could hurt industries reliant on feedstock subsidies, such as petrochemicals. By contrast, any change in energy subsidies to the power sector that would pave the way for more cost-reflective tariffs could improve the regulatory environment for infrastructure entities and weigh positively on their business risk profiles.

• Following the strong recovery in Dubai's residential and commercial real estate markets, we've assigned new ratings to mall developer Emaar Malls Group LLC (BBB-/Stable/--), office property developer DIFC Investments LLC (BBB-/Stable/--), and residential developer Damac Real Estate Development Ltd. (BB/Stable/--).

We expect additional supply to outpace demand over the next few years and consider stable or softening prices for Dubai residential property to be more likely than continued rapid price increases.

“On average, hydrocarbon revenues constitute 46 per cent of nominal GDP and three-quarters of total exports for the six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE).

Therefore, the recent drop in hydrocarbon prices, if sustained, could have a significant impact on the region's economic and financial indicators.

We view Bahrain and Oman as most vulnerable to a decline in the hydrocarbon market, and Qatar and the United Arab Emirates (UAE) as the least vulnerable.

While the Gulf countries' significant oil and gas reserves are key supports for their sovereign credit ratings, their economies' concentration in the hydrocarbon sector is also a significant vulnerability, in our view.

“Dubai is the exception in that it relies more heavily on trade, tourism, real estate and construction, and transportation and is enjoying favourable economic conditions, notwithstanding its federal relationship and political and economic ties with Abu Dhabi–-itself an oil-rich sovereign.

Shifts in the real estate and construction sector have been behind Dubai's economic swings in the past; the sector accounted for just over 20 per cent of GDP in 2013 (down from about 30 per cent in 2008).

Dubai real estate rents and prices have stabilised after a period of rapid growth, as supply additions have caught up with demand.

“Although market sentiment may drive prices in the near term, the amount of new supply (and the extent to which the authorities manage it) will be the key to market developments going forward.

Current prices allow for robust margins for developers that acquired land at historically low rates, and will therefore likely keep the supply pipeline healthy.

“We expect total credit in the GCC banking system to grow by about 10 per cent annually in 2014 and 2015 as banks take advantage of growing economies, recovering corporate asset quality, and ample financing opportunities.

The system's asset base will likely climb to roughly $2 trillion by year-end 2015, by our estimates, up from $1.7 trillion as of year-end 2013.”