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Moody’s Sees Better Credit Quality for GCC Corporates


Middle East : 12 July 2012

Source: Khaleej Times

A modest global economic recovery combined with high oil prices and the reduction of refinancing exposure helped to further enhance the credit quality of rated non-financial corporates in the GGC, Moody’s Investors Service said in a special report on Monday.

High oil prices have bolstered the ability of GCC governments to invest windfall profits in public and social programmes, said Martin Kohlhase, a senior analyst at Moody’s Corporate Finance Group and author of the report.

“This increased spending has directly helped corporates in the infrastructure, utility/energy and real estate industries, and indirectly supported those active in the retail, hospitality and tourism sectors by boosting consumer spending,” said Kohlhase.
The global ratings agency upbeat report on the GCC non-banking companies is in sharp contrast to its recent observation that banks the region would be facing a severe cash shortfall in the wake of cutback of lending by European banks.

In March, Moody’s warned that funding for an estimated $1.8 trillion of capital investments underway in the GCC would be in jeopardy with banks in the region facing a cash crunch.

Moody’s new report, entitled “GCC corporates: Credit quality bolstered by modest global recovery and high oil prices”, argues that GCC corporates have also taken steps to reduce their refinancing exposure and strengthen their liquidity profiles by repaying debt or rolling over previous maturities.

Moody’s notes that rating trends within the main GCC markets are driven by different factors.

“In Dubai, rated corporates with exposure to refinancing risk have successfully repaid or refinanced maturing capital market debt instruments during 2012 first half, thus resolving longstanding uncertainty affecting the emirate,” it said.

In Abu Dhabi and Qatar, the region’s other two main markets, Moody’s expects the generally solid credit profiles of rated issuers to continue benefiting from favourable government policies and strong public finances.

Moody’s scenarios of oil price volatility and regional geopolitical factors would only have a moderately adverse impact on the credit quality of its rated issuers because of the strategic nature of government investment programmes.

“If break-even oil prices were to rise further, the hydrocarbon wealth accumulated over the past decade would allow governments to sustain their spending programmes, thereby limiting the downside risks for corporates that rely on them,” thee report said.

The ratings agency believes that if Iran were to block the Strait of Hormuz, the resulting disruption to oil supplies, while substantial, would likely be short-lived, because this critical channel for global supplies would in all likelihood reopen relatively quickly.

While GCC banks will have to face a short-term liquidity squeeze and a long-term structural shortfall in the event of “a sustained retrenchment” by European banks from the region, ratings agency believes that it would not be a concern for rated corporates in the region.

“Banks’ lending activities to highly rated government-related issuers, or GRIs, which make up a significant portion of Moody’s rated GCC corporates, remains unchanged given that GRIs are less problematic from a risk-weighted asset perspective,” the report said.

“Weaker corporates have either turned to regional or other international banks, or expanded their debt capital market access to offset the reduced lending limits introduced by some European banks,” Moody’s said in its report.

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