World Economy

(P)GCC Firms Under Oil Price Pressure

(P)GCC Firms Under Oil Price Pressure(P)GCC Firms Under Oil Price Pressure

Corporate and infrastructure companies in the (Persian) Gulf Cooperation Council face a weaker operating environment on the back of lower oil prices, said a Standard & Poor’s report, adding that government expenditures, on which these companies largely depend, are slowing.

Reflecting this weak economic climate, debt issuance by corporate and infrastructure companies has fallen by 58% in the past 12 months to about $7 billion, added the report “Some (Persian) Gulf corporates could feel the heat on low oil prices” released Monday by Standard & Poor’s Ratings Services, TradeArabia reported.

“This also reflects our view that the credit cycle has reached a potential tipping point, with higher pricing anticipated going forward,” said the ratings agency.

“We nevertheless see various factors that could tempt existing and new issuers to tap the capital markets over the coming year. These include the gradually declining availability of liquidity at the local banks, the opening up of markets to foreign investment (such as the Tadawul in Saudi Arabia, along with the Iranian market as the nuclear deal with the P5+1 progresses as expected), and the refinancing by government-related entities in 2016.”

According to S&P, ratings on some companies with exposure to commodity markets have come under pressure due to the lower oil prices. Similarly, ratings on GREs connected to some sovereigns have been constrained. “We have lowered the ratings on Bahrain and Oman in 2015. The sovereign ratings on Bahrain and Saudi Arabia remain on negative outlook,” the report said.

The Dubai real estate market is also going through a correction, with residential prices expected to decline by about 10% to 20% during 2015. “However, we think our ratings on UAE property developers and property investment companies are cushioned enough to withstand the current correction,” said the S&P report.

“Despite our expectation of a tougher pricing environment ahead, we expect (P)GCC issuers will have sufficient headroom within their financial profiles to withstand a stress scenario of a rate hike by the Fed, which is usually reflected in (P)GCC central bank rates, of 150-200 basis points with a limited impact on their financial profiles in the short term,” the report added.

“Energy subsidy cuts by Bahrain, Oman and the UAE governments could increase financial pressures on downstream corporates in the region. Arab governments are currently protecting large public sector investment budgets to support economic growth. Yet, the longer the oil price remains at current lows, the more likely these could be postponed or cut,” it concluded.