Moody's says Gulf faces debt challenge

Gulf companies face a "wall of maturing debt" that will pose a major challenge for many of them by 2012, the international ratings agency Moody's Investors Service says. In a report on the Gulf corporate scene, the agency said total debt in the region amounted to US$145 billion (Dh532.59bn), of which $28bn would mature in the next 18 to 30 months.

"Dubai and Abu Dhabi-based entities account for the majority of this debt. The most exposed sectors are investment holding companies and real estate developers," Moody's said. The report comes after a six-month period in which Moody's and other ratings agencies have downgraded the financial health and creditworthiness of many companies in the region, including government-related issuers (GRI) of debt. On average, GRI and non-GRI entities have dropped three notches on Moody's ratings scale.

The agency said the credit environment in the Gulf region would remain challenging "as access to capital and liquidity remains constrained". The factors that might improve the situation, in Moody's view, include restoring confidence, greater transparency, a better regulatory framework, a more stable macroeconomic environment and better access to financial markets. Some experts were critical of the Moody's conclusions.

"The real wall of debt in the world is building in Europe and the US, where it has been built up to fund private consumption, toxic assets and budget deficits," said Dr Nasser Saidi, the chief economist of the Dubai International Financial Centre. "In the Gulf, debt has been used to finance infrastructure investment and expansion. It will produce revenue over time. "With oil at $70 to $80 a barrel, Gulf countries will have current account surpluses, so will have more liquidity to deal with debts. They have learned the lesson that it is better to invest revenue at home than to put it in US Treasury bills."

Moody's said its ratings for "Dubai Inc" companies assumed low levels of Dubai Government support, following statements made after the restructuring of Dubai World last November. "Neither the Federal Government of the UAE nor the Government of Abu Dhabi has articulated a clear policy of whether and when it will step in to support Dubai Inc companies," the report said. Abu Dhabi "core entities" such as the International Petroleum Investment Company, Mubadala Development and the Tourism Development and Investment Company are fully government-owned, closely linked to the diversification strategy under the 2030 plan, and "still benefit from high support assumptions".

Ratings for Aldar Properties, the Abu Dhabi National Energy Company and Dolphin Energy also incorporate "high support", Moody's said. In a separate report on the banking and financial sector, it said banks in the MENA region had been comparatively well insulated from the effects of the global financial disruption and downturn. But the agency said the region's banks continued to face challenges that varied greatly from one subregion to another, as reflected in the banks' differing risk profiles.

"Some banks in the Gulf have been affected but the impact has not been that great," said Mardig Haladjian, the general manager of Moody's in Cyprus. "From a ratings perspective, the changes we needed to make were minimal compared to globally. The regulators should be on their guard and learn the lessons. "Almost every government in the region was very proactive and provided funding to banks and in that sense the measures taken were positive."

Mr Haladjian said banks were still being cautious on lending and bad loans and provisions would pick up further this year. "Dubai World's restructuring figures to play a role here, though its resolution has been positive for the most part," he said. "We were fearing the worst. Is there more? Probably. Dubai Holding? What else?" @Email:[e-mail] @Email:[e-mail]