3 key risks that could dampen companies’ fundraising in the Gulf
Political risk, energy subsidies, and tax reform in the Gulf region are key near-term risks for the corporates looking to raise capital, according to the ratings agency S&P Global Ratings.
“We see political risk, energy subsidies, and tax reform across the GCC as some of key risks to the region’s corporate ratings. A reduction in energy subsidies may weaken the operating performance of utilities and downstream oil and gas companies to the extent that it isn’t compensated for by tariff reform or other support measures,” the ratings agency said in a report titled ‘Despite Mounting Uncertainties, GCC Capital Market Issuance Is Climbing Rapidly’.
“Highly aggressive tariff reform that would rapidly increase electricity and water tariffs can also have negative consequences for demand and the economy as whole. The introduction of a value-added tax (VAT) across the GCC starting in 2018 could further dampen regional domestic demand and economic activity,” S&P said.
A glimmer of hope for corporates
Overall, however for GCC corporate and infrastructure capital market issuance, 2017 is shaping up to be a bumper year, S&P noted.
Volumes are already more than double those of last year—with almost two months still to go. As central banks hike interest rates along with the U.S. Federal Reserve, and with significant political uncertainty hanging over the region, issuers are keen to lock in long-term funding at still attractive rates.
Higher oil prices in recent weeks, boosted by rising global demand and expectations that OPEC and other producing countries will extend a deal to cut production, offers a glimmer of hope for GCC corporates that have endured tough operating conditions for the past three years, the ratings noted.
The most unpredictable and significant risk factor is political risk, most notably the increasing tensions between Saudi Arabia and Iran playing out in Bahrain, Iraq, Lebanon, Qatar, Syria, and Yemen, charges of corruption against ministers and leading business figures in Saudi Arabia, and the ongoing trade embargo of Qatar, S&P report adds.
Notably, the Qatar embargo has resulted in downgrades of one or more notches and negative CreditWatch placements or outlooks on all rated corporates in the country, it noted.
Soft real estate markets across the GCC
“We expect that difficult operating conditions in the region will continue to hurt the real estate sector for the next 12 months in the absence of positive triggers,” S&P noted.
“Despite these emerging political risks, real estate ratings in the UAE have largely remained stable. UAE residential property prices and rents have declined by 5%-10% during the year, in line with our previous expectation,” it added.
In Dubai, it continued, the biggest threat continues to be potential supply coming to market in the next two to three years, which would likely not only soften sale prices but also dampen rental yields.