Middle East credit ratings are expected to come under further downwards pressure due to low oil prices, according to Zurich-based Fisch Asset Management.
The latest regional analysis from the asset manager says ratings pressure will grow as leverage increases on GCC corporate and sovereigns.
It said its subsidiary Independent Credit View (I-CV) had completed credit analyses for Emirates Airlines, Saudi Telecom Company (STC) and a sovereign rating for Kuwait.
It handed the latter an ‘A’ ranking based on abundant natural resources, large oil reserves and high income per capita, but pointed out key weaknesses such as economic diversification and dim growth prospects due to the oil price collapse.
I-CV, rated Emirates Airlines ‘BBB’-/Marketweight for issuance of senior unsecured debt, Fisch said, based on Emirates’ longstanding track record in airline operations, and Dubai’s enabling regulatory environment. Weaknesses included geopolitical and economic risks, along with oil price erosion.
Meanwhile, STC was rated ‘A-‘, highlighting its high and stable margins, free cash flow, pursuit of an expansion strategy in neighbouring countries, and stability provided by state ownership. The report stated that current low oil prices impacting Saudi Arabia’s economy had not impacted STC, but pointed out that such a situation could change rapidly. The report noted that up to 20% of outstanding receivables could be classified as doubtful debts, which is a significant concern.
Overall, Fisch said an increase in primary issuance would support diversity and liquidity in the regional market, leading to a broadening of the fixed income investor base.
However, it stated that corporate governance in the Middle East needed to improve, especially in relation to transparency surrounding the use of proceeds.
Philipp Good, head of portfolio management at Fisch Asset Management, said: “Middle East countries have the capacity to lever up. The region has the highest average ratings globally, but budget deficits need to be addressed through a combination of investment and reform.
“The funding of these deficits can be achieved at a sovereign level or among government related entities. Privatisation will also play a key role.”
Source: Arabian Business