Fisch Asset Management, one of the leading credit specialists, has said that despite challenges in the energy sector there is reason for optimism among investors in Saudi Arabia. The budget deficit is set to narrow in 2017, as a result of higher oil prices and diversification measures increasing non-oil revenues. However, while speakers at Abu Dhabi's World Future Energy Summit emphasized the importance of the Kingdom's economic transformation for fast-tracking investment in renewables, it is clear that improving oil prices will be a key driver for short to medium term growth. Recent forecasts have predicted a Saudi budget deficit of $85 billion in 2017, compared to $107.5 billion in 2016, with oil prices rising to $57/barrel. On that basis, improving oil revenues resulting from higher prices could account for up to a 25% medium-term fiscal adjustment. Despite efforts for diversification, oil revenues remain critical for Saudi Arabia's short to medium term growth. A normalization of Aramco's contributions to the budget in part explain the predicted increase in oil revenues for 2017. Meanwhile, from 16-19 January, the World Future Energy Summit in Abu Dhabi hosted a dedicated Saudi Arabia Pavilion, in view of the Kingdom's Vision 2030 aims to guarantee the competitiveness of renewable energy. Assessing the proposed initial public offering (IPO) of 5% of Saudi Aramco, the latest credit report by Independent Credit Review (I-CV), a subsidiary of Fisch, expects a maximum leverage of 2.5x, qualifying it for a rating in line with the sovereign. The company has said that it has the largest proven oil reserves in the world, with I-CV suggesting a reserve life of 70 years and yearly production of 3.7 billion barrels of oil equivalent (BOE). Philipp Good, CEO at Fisch Asset Management, said: "As a state-owned company operating in the Kingdom's most important sector, we expect Saudi Aramco to leverage up to a maximum of 2.5x when it is listed. We also think Aramco could qualify for a credit rating of A-, in line with the sovereign rating. Moreover, with the likelihood that oil price improvements will drive a shrinking of the budget deficit by as much as 12% of GDP, we think it is very likely that Saudi Arabia will issue a Sukuk in the first quarter of 2017. "Oil prices and revenues remain a huge contributor to the Saudi economy so it's encouraging that they have stabilized from previous lows. A balanced budget in the Kingdom by 2020 is a big challenge but investors, who have seen government initiatives to boost short-term growth and introduce medium term fiscal reforms, appear confident. We look forward to seeing how this develops." I-CV also published a review affirming an independent rating of A for Abu Dhabi's International Petroleum Investment Company (IPIC), citing its strategic economic importance for the Emirate. IPIC faced the challenges of lower commodity prices, declining crude oil prices and depreciation of the Euro in 2015, resulting in a net loss of $2.6bn, compared to profits of $1.5bn in 2014. Stabilization of commodity and oil prices towards the end of 2016 have improved expectations for the company's financial profile, as has the June 2016 announcement by the government of Abu Dhabi to merge IPIC with Mubadala Development Company. I-CV's January 2017 review for the Abu Dhabi National Energy Company (TAQA) downgraded its rating from A- to BBB+, in response to a weak market environment in the Oil & Gas sector and a weakened financial risk profile. The review indicates that, despite recent low oil prices, TAQA's EBITDA margin has remained relatively stable owing to the predictable nature of its power and water segment and heavy cost cutting in its Oil & Gas segment. "Looking at the rest of the GCC, we believe there is a good chance of some sizeable debt issuances in 2017. There are likely to be at least a handful of multi-billion dollar bond or sukuk issuances by Kuwait, Saudi Arabia, Oman and Bahrain, with potential for some opportunistic issuances by Abu Dhabi and Qatar, depending on pricing. We also expect a range of banks to issue debt in the region of $500-750 million, with a handful of corporates possibly doing the same. It could be a very interesting year for debt investors focused on the Gulf." — SG
