Saturday, February 14, 2009

Dubai Faces Further Liquidity Challenges, Says Moody's

13 February 2009
DUBAI - Gulf Arab companies especially in Dubai are facing further liquidity challenges as well as declining credit quality amid the steep global downturn, ratings agency Moody's Investor Service said on Thursday.

"Dubai is particularly vulnerable due to its closer integration with key sectors of the global economy, particularly real estate, tourism, trade and financial services," said Moody's in its 2009 outlook on Arabian Gulf corporates.

While corporate issuers in the region largely remained in a financially strong position in 2008, "overall credit quality in the region has declined, and is likely to continue to do so moving forward."

Moody's estimated that companies in the region require some $35 ?billion to $40 billion in debt refinancing this year.

The Gulf region has seen an unprecedented economic growth in recent years but the worldwide recession took a turn for the worse in the fourth quarter, hitting even the most resilient economies in the region as oil prices which fuelled local real estate markets, also collapsed on weak demand.

"Fundamental credit quality is likely to be tested in the downturn," said Moody's, adding that the Gulf has never before been financially tested on such a large scale.

"Rated gulf corporations are not immune from the global financial and economic crisis, particularly where they rely on external demand for their goods and services, or on fresh liquidity to support their operations", said Moody's.

The ratings agency said Dubai in particular, is facing an unprecedented level of contingent government liabilities, that call into question "less so its willingness, but its ability to support flagship corporates in the event of such a requirement." Dubai's mostly government-run corporates will need to refinance about $15 billion of $70 billion in debts in 2009. The total corporate debt in the Gulf region reached some $20.4 billion last year, heavily concentrated among government-related issuers. UAE issuers made up 90 per cent of total outstanding rated debt, with Dubai alone representing 51 per cent and Abu Dhabi, 39 per cent.

The total rated and unrated ?corporate financing requirements among members of the Gulf Cooperation Council in 2009 is about $35 to $40 billion.

"Addressing these maturities will be a significant challenge, although we expect liquidity to return to the markets as 2009 progresses, and bond spreads to recede from some of the panic-stricken levels seen in the second half of 2008," said Moody's.

It said that as markets re-open, issuers with sound credit fundamentals and government-backing should be able to close financing transactions, but these come at a price."The end of cheap money money has also reached the Middle east, and we expect companies will have to accept far more expensive funding going forward in return for better long term liquidity."

The tougher credit landscape will force companies to reassess their business plans as they respond to the new environment, Moody's said.

Moody's also expressed concern about the recent move of Abu Dhabi to inject Dh16-billion in fresh liquidity to five banks and said this may have a bearing on future credit ratings.

It said the move has been ?interpreted "as a sign that Abu Dhabi is becoming more reticent about supporting banks and other systemically important entities in other emirates."

"Moody's will continue to monitor developments closely. If a trend of selective treatment within the federation becomes discernible, Moody's stands ready to reduce its high support assumptions for government-owned companies in other emirates outside Abu Dhabi."

© Khaleej Times 2009

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