(The following statement was released by the rating agency)
Nov 17- 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 $25 billion will mature in
2012, rising to about $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, and the 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 Co., 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, because it could limit banks'
willingness to lend.
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). Our BICRA criteria enables an evaluation of individual banking systems,
producing scores that classify systems into one of 10 groups, with group '1'
being the lowest risk, and group '10' the highest.
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 government-related entities.
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.