JEDDAH, 7 February 2006 — Credit quality in the Gulf region looks set to continue to improve thanks largely to windfall revenues arising from the surge in oil prices in 2005, according to a report published yesterday by Standard & Poor’s Ratings Services. Titled “Oil and Gas Revenue Windfalls Boost Outlook for Credit Quality in Gulf Region in 2006,” the report highlights how these revenues, which have strengthened the balance sheets of governments across the Gulf states, are underpinning significant investments in real estate, industry, and infrastructure.
“Windfalls from high oil and gas prices spawned substantial budget and current account surpluses across the Gulf and led to significant inflows of capital into the region’s economies,” said Standard & Poor’s credit analyst Konrad Reuss. “Furthermore, in contrast with previous oil booms, governments have made good use of higher revenues by investing in downstream as well as upstream operations. “Some risks remain, however. The boom conditions have rippled through to the stock and real estate markets, which if not checked could create instability. In addition, geopolitical risk - in the form of accession and system legitimacy - temper sovereigns’ balance-sheet strength. Nevertheless, with economic conditions remaining relatively benign, the report said economic growth in the Gulf in 2006 will be sustained at similar levels to those in 2005.”
The region is investing heavily in new infrastructure and also in diversification of existing industries. To this end, project financings in the Middle East totaled $44.3 billion in 2005.
“Dubai is a prime example, with its huge investments in real estate and transport infrastructure,” said Standard & Poor’s credit analyst Jan Willem Plantagie. “With strong sovereign support and expected ongoing high oil prices, the outlook for project finance ratings is extremely positive.”
Meanwhile, the petrochemicals industry in the Gulf region is expected to continue to post double-digit growth over the medium term, and as a result about 20 percent of the world’s ethylene production is expected to be located in the Middle East by 2010. Ethylene is the key building block for chemicals and mainly used to produce plastics.
“Besides easy access to very competitively priced feedstock such as ethane and naphtha, the Middle East enjoys a favorable geographic position to serve the fast-growing Asian markets as well as the established European and North American markets,” commented Standard & Poor’s credit analyst Tobias Mock.
For reasons of economic diversity and capturing higher margins, the report added the Middle East to take on a more prominent role as a major exporter of refined oil products. According to the International Energy Agency, investments needed in the region’s oil and gas sector could be as much as $39 billion a year to ramp up oil production by 50 percent to 36.8 million barrels per day by 2020 from 24.7 million barrels per day in 2004, and almost triple gas production to 700 billion cubic meters per year in 2020 from 260 billion cubic meters in 2003.
“We expect national oil companies to be the biggest investors in the region, and that more of them will be looking for long-term funding in their own name, via the capital markets and with the aid of credit ratings,” added Mock. “Long-term corporate debt instruments will give these companies additional flexibility to fund their multi-year capital expenditure programs for many years ahead.”
“In the banking sector, the upgrade of seven banks in Kuwait and Saudi Arabia at the end of January 2006 reflected our opinion that the governments of these countries would be likely to provide extraordinary assistance to the systemically important banks in the two countries in the event that these banks encounter distress,” said Standard & Poor’s credit analyst Emmanuel Volland.
The growth of the insurance market in the Middle East raises the question of whether new companies coming to market will be rated. In addition, Takaful insurance has grown in scale and significance. There has been increasing interest in whether Standard & Poor’s will rate the new insurance companies, or start-ups, in the Gulf region.
“It is possible for start-up companies to be assigned a rating, but we believe that a disciplined and conservative approach in such circumstances is crucial,” said Standard & Poor’s credit analyst Kevin Willis. “The outlook for the insurance market is very upbeat. Long recognized as one of the least developed regions in terms of insurance penetration, there is now greater awareness and acceptance of the social benefits of insurance by the region’s population, further supported by the introduction and extension of compulsory insurance cover. Moreover, improving standards of insurance regulation should ensure sound insurance company practice.”