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S&P: GCC government work jeopardised by oil prices

Standard & Poor's expert says a sustained dip in oil prices increases odds that "more infrastructure projects [are] postponed or dropped" by GCC governments

A sustained dip in oil prices will stall infrastructure growth in the GCC. [Representational image]
A sustained dip in oil prices will stall infrastructure growth in the GCC. [Representational image]

Standard & Poor's Ratings Services (S&P) announced on Monday, 21 September, 2015, that while it expects that some corporates and infrastructure issuers in the GCC to "feel the weight of lower oil prices, most of its rated entities show resilient financials for now".

In an industry report card it published, titled Some Gulf Corporates Could Feel The Heat On Low Oil Prices, S&P stated: "Corporate and infrastructure companies in the GCC face a weaker operating environment at present on the back of lower oil prices.

"Prices of oil have more than halved since June 2014, thereby slowing government expenditures, on which these companies largely depend." 

According to the report, the drop in oil and gas prices triggered a 58% reduction in corporate and infrastructure bond, and sukuk issuances over the 12 months ended 31 August 2015, compared with the previous 12 months.

This declining issuance was partly because of the tightening of budgets at key government-related entities (GREs) that carry out important roles in infrastructure projects on behalf of their respective governments.

"In some cases, limited government budgets prompted the cancellation of infrastructure projects," the report added.

With regard to entities exposed to the oil and gas industry, a sharp reduction in capital expenditures is also leading to lower issuance.

S&P's credit analyst Karim Nassif, said: "We observe, however, that GCC governments continue to invest in large public sector infrastructure projects.

"Still, the longer the oil price remains near current low levels, the higher the likelihood of seeing more infrastructure projects postponed or dropped." 

The report continued to state that Dubai's real estate market is also suffering, with residential prices expected to decline by about 10%-20% during 2015.

Nassif added: "However, we think our ratings on property developers and property investment companies in the UAE are cushioned enough to withstand the current correction."

Energy subsidy cuts by Bahrain, Oman, and the UAE governments could increase financial pressures on downstream corporates in the region, the report continued.

"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." 

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