Gulf businesses will find it harder to get funding

Financial Fallout: Big businesses in the Gulf face rising borrowing costs as a result of the US and euro zone troubles - with video.

Big businesses in the Gulf are likely to be drenched by the shock waves from the fiscal troubles in the US and the euro zone.

Plans to raise money in debt capital markets are likely to be hampered by the fallout, say analysts.

"For any borrowers looking at refinancing public debt in the near term, the likelihood is that their cost of borrowing will have escalated in the wake of Standard & Poor's action [to downgrade the US' top-tier credit rating]," says Chavan Bhogaita, the head of credit research, financial markets division, at National Bank of Abu Dhabi.

The S&P downgrading is expected to drive up the cost of borrowing for the US government and that country's companies. With the cost of borrowing in the Gulf linked to US dollar interest rates, any rise in US borrowing costs will increase how much debt-issuers in the Middle East pay as well.

Gulf bonds are already experiencing a sell-off as a result of S&P's action along with sovereign debt woes in the euro zone.

Regional credit default swap (CDS) spreads, a measure of the cost of insuring debt against default, have widened. Spreads on Dubai's five-year CDS yesterday widened to 355 basis points, up five points from Friday's close

A rockier fund-raising environment raises questions about the ability to refinance regional debt. The challenge is particularly acute in Dubai, with much of the estimated US$114 billion (Dh418.7bn) in debt falling due this year and beyond belonging to government-related entities.

"Given that Dubai is still restructuring its debt and faces repayments in 2012 of maturing corporate bonds, the continuation of risk aversion and market volatility could impact Dubai's ability to raise funds at much-needed lower cost to improve its fiscal sustainability stance," says Alia Moubayed, an economist at Barclays Capital.

The unfolding debt saga on both sides of the Atlantic has already put the brakes on fund-raising by companies and governments in the Middle East. Dolphin Energy, a gas production and pipeline company based in Abu Dhabi, and the mall operator Majid Al Futtaim Holding have both postponed bond issues until market conditions improve.

Nevertheless, once the initial market shock eased, market conditions would gradually become more conducive to bond sales from top-quality Gulf issuers, Mr Bhogaita says.

 

tarnold@thenational.ae

Published: August 9, 2011 04:00 AM

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