Saturday, Aug 09, 2008
Investors use ratings as an indication of the likelihood of ultimately receiving their capital and return back in accordance with the terms under which they invested. The return can be either profit or interest-based within the Middle East. Fitch's ratings are broadly consistent indicators of relative vulnerability rather than predicative indicators of actual credit risk.
One of the main drivers behind the continued strong growth of credit ratings in the Middle East has been the diversification away from regional equity markets as the single source of funding for many of these rapidly expanding economies. Given the volatility in these equity markets in recent years, investors have begun to look beyond the equity horizon. From a shareholder perspective, not all companies have the desire for expanded boards and the accommodation of varied return requirements which could result from an additional equity sale. In essence, these companies find the "defined return" aspect of the debt capital market more attractive, which has led to a greater diversification in funding strategies.
Evidence of increased debt capital market activity includes news from earlier this year that the emirate of Dubai is to borrow at least $10 billion to fund new infrastructure projects, whilst AAOIFI has issued six advisory notes relating to the issuance of sukuk. Both of these developments further underline that the ongoing development of the region cannot exist on equity alone, and that the conventional debt and Islamic sukuk markets will expand further to meet funding requirements.
Credit ratings are utilised on an ongoing and recurrent basis by the debt capital markets, both on the long and the short-term side, and in the public and the private domains. Many investors track debt indices, which have a defined level of credit rating requirement. Their internal investment parameters will also make reference to ratings.
Other users of credit ratings are the counterparty risk management functions within the inter-bank lending sector and the commercial lending market. Where there are many similar, but not necessarily identical, investment opportunities available to each investor, managers often prefer to select the entity which distinguishes itself from its peers through its credit rating.
As the UAE and surrounding region become more and more integrated into the global economy, the need to exhibit financial and operational transparency and discipline on an international level becomes more important. The benchmarking against peers, both domestic and international, which is evidenced by the provision of an internationally recognised and accepted credit rating is therefore certainly of benefit in the medium to long term.
- The writer is head of business development, Middle East, at Fitch Ratings. Views expressed are author's own.
By Stephen De Stadler
Gulf News 2008. All rights reserved.
