Oil squeeze could derail GCC infrastructure plans, increase refinancing risks

 

GCC corporations have finally begun feeling the pinch of low oil prices.

The drop of more than 50 percent in Brent crude from mid-June 2014 has led to lower deposits and a liquidity squeeze among domestic banks, a scenario that’s expected to result in fewer infrastructure projects taking off as financing them gets trickier.

According to ratings agency Standard & Poor’s, the drop in oil has also contributed to a 58 percent reduction in issuances of corporate and infrastructure bonds and sukuk over the past 12 months, primarily because tighter budgets and reduced capital expenditure among the GREs (government-related entities) that are involved in building this infrastructure.

S&P purports that this has even led to the cancellation of projects in some cases, without explicitly naming the ones that have been canned.

“The longer the oil price remains near current low levels, the higher the likelihood of seeing more infrastructure projects postponed or dropped. We note, in particular, statements from the Saudi minister of finance in early September 2015 that the country is looking to cut unnecessary expenditures,” S&P warned in a recent analyst note.

A weaker operating environment and reduced access to bank funding could lead to higher refinancing risks and spur more capital issuances going forward, as a number of GREs are likely to want to tap the capital markets in the coming year, when approximately $14 billion of debt falls due.

“The local banks still have healthy liquidity pools, but we expect a visible weakening, which, in turn, should tighten the funding available to corporates and increase their appetite for debt capital market issuance over the coming two years. We also expect corporate loan pricing to rise markedly,” says S&P. However, the “pressure on governments to reduce capital expenditures and curb subsidies”, coupled with the US Federal Reserve’s discussions on interest rates, could signal headwinds for issuances, the ratings agency believes.

Sectorally, S&P has a stable outlook on utilities, defensives such as telecom majors, but expects the ratings of companies with exposure to commodity markets and GREs connected to sovereigns like Bahrain and Saudi Arabia to come under pressure. It believes UAE property developers and property investment companies are “cushioned enough to withstand the current correction”, despite several headwinds that will lead to a ten to 20 percent price correction in the market.

 

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