Rising debt maturities in Gulf region pose refinancing risks

According to industry experts, an estimated USD 25 billion in bonds and sukuks will mature in 2012, rising to about USD 35 billion in 2014.

The ratings service said it believes the region is entering a challenging loan and bond refinancing cycle, especially given the ongoing volatility in capital markets and fears that slowing global economic growth is already curbing corporate debt issuance and heightening refinancing risks in the region.

"We anticipate that Gulf sovereigns will continue to benefit from high oil prices and increases in hydrocarbon production, which are bolstering government finances and external accounts," S&P said in a statement.

"We expect that economic activity in 2011 will record its highest growth rate since the onset of the global financial crisis, supported by accelerated government spending and large-scale infrastructure investment," it said.

"Yet, in spite of generally solid headline figures, public finances in the region have deteriorated structurally. Partly in response to the Arab Spring, many governments in the region have increased spending on social transfers, wages, housing, and infrastructure," it added.

It said dependence on hydrocarbon revenues to finance such spending has increased, which is reflected in higher non-oil budget deficits and increased break-even oil prices.

"With the global economy weakening in 2012, we think the main channel of impact for the GCC will be through weaker demand for hydrocarbons and hence lower oil prices," S&P said.

"Among Gulf corporates, several companies have delayed issuances, which we believe could accentuate refinancing risks for these players," it said.

"Of all the Gulf corporates that Standard & Poor's rates, only one (International Petroleum Investment Company) has tapped the capital markets over the past six months. Most turned instead to banks to meet their funding needs.

"We have also seen less issuance in the rated GCC infrastructure and project finance sector," it said, adding that although it believes that financing needs remain sizable, particularly in the power and water sectors, issuers that could afford to wait have generally held back from tapping the capital market and banks, perhaps hoping for better pricing conditions at a later date.

"We anticipate that Gulf governments will likely continue to prioritise projects in power, water, and hydrocarbons that they consider essential to the economies and growing populations of the regions, over other infrastructure sectors, such as transport and renewable energy," S&P said.

"Banks' implementation of the Basel-III regulations also poses a medium to long-term challenge for the bank financing of this asset class in the region, in our view," it said.