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Soaring debt maturities in Gulf pose refinancing risks
Published in The Saudi Gazette on 20 - 11 - 2011

The Gulf Cooperation Council (GCC) region faces rising refinancing risks over the next three years because the amount of debt maturing in the region will increase significantly between 2012-2014, Standard & Poor's Ratings Services said in a report.
Industry experts estimate bonds and sukuk of about $25 billion will mature in 2012, rising to about $35 billion in 2014. Standard & Poor's believes the region is therefore 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 risk in the region.
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.
For Gulf banks, the report said they will generally not need to increase their capitalization because their current capital levels are already significantly higher than the new Basel III requirements and the composition of bank capital in the GCC is generally of high quality.
Among our recently revised Banking Industry Country Risk Assessments (BICRAs), Saudi Arabia is the strongest belonging in group 2. Oman, Qatar, and Kuwait (group 4); UAE, group 5 and;Bahrain's banking system in group 6, which is the highest risk among the GCC countries.
Under BICRA criteria, group ‘1' has the lowest risk, and group ‘10' the highest.
The Gulf insurance sector is stable which reflects the companies' generally strong capital adequacy, strong asset liquidity, and strong technical earnings. Although all of the GCC insurance markets are very competitive, the report said the majority of primary insurers maintain favorable underwriting margins.
“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 S&P's rates, only one (International Petroleum Investment Company) has tapped the capital markets over the past six months.

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