Rising debt maturities in Gulf region pose refinancing risks

Standard & Poor's Ratings Services has said that issuers in the Gulf Cooperation Council (GCC) region face rising refinancing risks over the next three years because the amount of debt maturing in the region will increase significantly between 2012-2014.

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