DUBAI (Reuters) - S&P Global Ratings cut its credit ratings for two Dubai state-owned companies, saying a weakening economy in the emirate was hurting the government’s ability to extend emergency support to the firms if needed.
The downgrades were a fresh sign of pressure on Dubai’s economy, where the real estate and equity markets are slumping. The emirate does not have a sovereign credit rating, so analysts often look at state firms as indicators of its financial health.
“In our view, credit conditions in Dubai have deteriorated, which we believe affects the government’s likely ability to provide extraordinary financial support to its government-related entities (GREs) if needed,” S&P said.
The Dubai government’s media office could not immediately be reached for comment.
S&P lowered its rating on utility Dubai Electricity and Water Authority (DEWA) late on Tuesday to BBB from BBB-plus, assigning it a negative outlook, which indicates a significant chance of a further downgrade in future.
It was S&P’s first outright downgrade of DEWA. The agency had previously upgraded the company in 2012 and 2016, as the emirate recovered from a credit crisis that nearly caused it to default on its debt. A default was averted with $20 billion of aid from neighboring Abu Dhabi.
“The negative outlook on DEWA reflects the possibility that our assessment of Dubai’s creditworthiness could deteriorate further in the next two years, which would put further pressure on our rating on DEWA,” S&P said.
“This is because we assume that the government could use its power to intervene negatively, which could include burdening the company with additional dividends, taxes, or other liabilities.”
S&P also lowered its rating for real estate firm DIFC Investments (DIFCI) to BBB-minus, one step above junk status, from BBB, but with a stable outlook. DIFCI owns an office and retail complex in Dubai’s international financial center.
Analysts say that the pressures on Dubai are not as serious as those it faced a decade ago, and it has strengthened its finances since then by restructuring billions of dollars of debt at state-linked firms.
But as the region’s top business center, it has been hurt by an economic slowdown in Saudi Arabia and other nearby countries due to low oil prices. Political tensions with Qatar and Iran, and increasing competition for investment capital with Saudi Arabia, have also dampened business.
Dubai government bond prices and the cost of insuring Dubai sovereign debt showed little reaction on Wednesday to the S&P downgrades, partly because many investors assume Dubai can count on further aid from Abu Dhabi if necessary.
S&P said that because Dubai’s population growth had outpaced economic growth, its gross domestic product per person had declined to $37,000 in 2018 from a peak of $45,000 in 2013, a sign of deterioration in the government’s potential tax and funding base.
The agency predicted the drop would continue over the next couple of years, reaching $36,000 in 2020.
Editing by Andrew Torchia and Alison Williams