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JEDDAH - For Gulf Cooperation Council (GCC) corporate and infrastructure capital market issuance, 2017 is shaping up to be a bumper yea, S&P Global Ratings said in its November report. 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 US Federal Reserve, and with significant political uncertainty hanging over the region, issuers are keen to lock in long-term funding at still attractive rates. Single-exposure limits on banks are also forcing some GCC (including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) issuers to diversify funding sources.
S&P Global Ratings also sees an emerging trend in budget-constrained governments increasingly looking to their government-related entities (GRE) to tap capital markets for corporate and project bonds to complement record sovereign debt issuance. Two recent examples are Abu Dhabi Crude Oil Pipeline LLC (Adcop) issuing $3 billion of project bonds and Nogaholding issuing $1 billion of bonds.
"With government budget deficits remaining substantial, we expect this trend to continue into 2018," S&P said.
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: Real GDP growth has been about half of the rate prior to the oil price decline. Around 20% of our ratings carry negative outlooks, and around 85% of rating actions over the past year have been negative. Most of those have been linked to Oman and Bahrain, the sovereigns with the region's highest budget deficits, and Qatar, which is subject to trade embargos.
S&P noted that "about two-thirds of our rated corporate and infrastructure ratings are GREs, where the rating on the related sovereign often is a key rating driver. Bond and sukuk yields are up about 50 basis points year on year, partly in response to increasing political tensions in the region, but not to the extent that the higher borrowing costs have material ratings implications.
Sukuk yields have risen more than those for bonds, and corporate sukuk issuance volumes fell dramatically in the second half of 2017 versus the first half. This follows the refusal by Dana Gas PJSC to honor its sukuk obligations on the basis of noncompliance with Shariah. It remains unclear what ramifications this will have for future corporate sukuk issuance and whether the market will write this off as an idiosyncratic event linked to a specific issuer or something with wider ramifications for the asset class.
"We see political risk, energy subsidies, and tax reform across the GCC as some of key risks to the region's corporate ratings," the report said. 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.
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 across the GCC starting in 2018 could further
dampen regional domestic demand and economic activity, S&P report further said.
Similarly, fiscal deficits have also prompted corporate tax
and royalty rate increases in Oman.
Despite these emerging political risks, real estate ratings in the United Arab Emirates have largely remained stable. UAE residential property prices and rents have declined by 5%-10% during the year, in line with our previous expectation.
In Dubai, 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. But this hardly affects rated developers such as Emaar Properties PJSC and Damac Real Estate Development Ltd., given current strong margins and low leverage.
What does matter for them over the next two to three years is the ability to complete construction of presold units while maintaining their strong credit metrics.
The retail segment in Dubai also continues to see downward pressure on rents spurred by new supply and the growing threat from e-commerce. While GCC online sales account for only a fraction of total sales, e-commerce penetration has increased.
Online retailing in the GCC is forecast to grow to $20 billion by 2020 from $5.3 billion in 2015, according to A.T. Kearney.
Mall landlords clearly want a part of the e-commerce action and not just leave the game to the retailers. Emaar Malls PJSC’s (BBB-/Stable; owner of Dubai Mall) investment of $151 million for a 51% stake in fashion e-commerce site Namshi is a testament to this. Majid Al Futtaim Holding LLC, on the other hand, has chosen to build its online presence organically by differentiating the customer experience and integrating physical and digital offerings as part of
its long-term strategy. That means investments in digital wallets, last-mile delivery, and other organic platforms.
S&P
Global Ratings believes e-commerce is going to form a critical part of every mall landlord's strategy going forward.
Hotel landlords are having to accept much lower average daily room rates to maintain occupancy levels. "We expect a very high supply of new hotel rooms coming on the market in Dubai ahead of Expo 2020, especially in the midscale," it added. - SG
As central banks hike interest rates along with the US Federal Reserve, and with significant political uncertainty hanging over the region, issuers are keen to lock in long-term funding at still attractive rates. Single-exposure limits on banks are also forcing some GCC (including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) issuers to diversify funding sources.
S&P Global Ratings also sees an emerging trend in budget-constrained governments increasingly looking to their government-related entities (GRE) to tap capital markets for corporate and project bonds to complement record sovereign debt issuance. Two recent examples are Abu Dhabi Crude Oil Pipeline LLC (Adcop) issuing $3 billion of project bonds and Nogaholding issuing $1 billion of bonds.
"With government budget deficits remaining substantial, we expect this trend to continue into 2018," S&P said.
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: Real GDP growth has been about half of the rate prior to the oil price decline. Around 20% of our ratings carry negative outlooks, and around 85% of rating actions over the past year have been negative. Most of those have been linked to Oman and Bahrain, the sovereigns with the region's highest budget deficits, and Qatar, which is subject to trade embargos.
S&P noted that "about two-thirds of our rated corporate and infrastructure ratings are GREs, where the rating on the related sovereign often is a key rating driver. Bond and sukuk yields are up about 50 basis points year on year, partly in response to increasing political tensions in the region, but not to the extent that the higher borrowing costs have material ratings implications.
Sukuk yields have risen more than those for bonds, and corporate sukuk issuance volumes fell dramatically in the second half of 2017 versus the first half. This follows the refusal by Dana Gas PJSC to honor its sukuk obligations on the basis of noncompliance with Shariah. It remains unclear what ramifications this will have for future corporate sukuk issuance and whether the market will write this off as an idiosyncratic event linked to a specific issuer or something with wider ramifications for the asset class.
"We see political risk, energy subsidies, and tax reform across the GCC as some of key risks to the region's corporate ratings," the report said. 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.
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 across the GCC starting in 2018 could further
dampen regional domestic demand and economic activity, S&P report further said.
Similarly, fiscal deficits have also prompted corporate tax
and royalty rate increases in Oman.
Despite these emerging political risks, real estate ratings in the United Arab Emirates have largely remained stable. UAE residential property prices and rents have declined by 5%-10% during the year, in line with our previous expectation.
In Dubai, 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. But this hardly affects rated developers such as Emaar Properties PJSC and Damac Real Estate Development Ltd., given current strong margins and low leverage.
What does matter for them over the next two to three years is the ability to complete construction of presold units while maintaining their strong credit metrics.
The retail segment in Dubai also continues to see downward pressure on rents spurred by new supply and the growing threat from e-commerce. While GCC online sales account for only a fraction of total sales, e-commerce penetration has increased.
Online retailing in the GCC is forecast to grow to $20 billion by 2020 from $5.3 billion in 2015, according to A.T. Kearney.
Mall landlords clearly want a part of the e-commerce action and not just leave the game to the retailers. Emaar Malls PJSC’s (BBB-/Stable; owner of Dubai Mall) investment of $151 million for a 51% stake in fashion e-commerce site Namshi is a testament to this. Majid Al Futtaim Holding LLC, on the other hand, has chosen to build its online presence organically by differentiating the customer experience and integrating physical and digital offerings as part of
its long-term strategy. That means investments in digital wallets, last-mile delivery, and other organic platforms.
S&P
Global Ratings believes e-commerce is going to form a critical part of every mall landlord's strategy going forward.
Hotel landlords are having to accept much lower average daily room rates to maintain occupancy levels. "We expect a very high supply of new hotel rooms coming on the market in Dubai ahead of Expo 2020, especially in the midscale," it added. - SG
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