Arabian Gulf corporates face decline in credit quality

As the global financial and economic crisis reached the Arabian Gulf later than most other parts of the world, corporate issuers in the region largely remained in a financially strong position in 2008, Moody's Investors Service said in a new special comment.
However, as already evidenced by weaker financial performance in the last quarter of 2008, Moody's cautioned that 2009 will be challenging for issuers throughout the Gulf and Middle East, as companies face weaker global demand and scale back their investment plans to match lower cash flows. As such, Gulf-based corporate issuers — most of which are government-owned — are likely to face a further decline in credit quality.
"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 Philipp Lotter, Senior Vice President at Moody's Middle East in Dubai and author of the report.
"A key factor underlying ratings stability will be issuers' flexibility in maintaining their financial profiles under adverse conditions, strong liquidity and confirmation of high government support assumptions through proactive government actions where needed," said Lotter.
Moody's cautioned that the Gulf has never before been financially tested on such a large scale. Actions taken by Gulf governments in support of their respective flagship corporates have been encouraging. Such actions include central bank intervention and the provision of fresh liquidity, which ultimately provides greater stability for the environment.
However, Abu Dhabi's recent decision, to inject AED 16 bln (USD 4.4 bln) of fresh tier one capital into its banks has raised concerns among some observers, who have interpreted this as a sign that Abu Dhabi is becoming more reticent about supporting banks and other systemically important entities in other emirates.
If a trend of selective treatment within the federation becomes discernible, Moody's said it stands ready to reduce its high support assumptions for government-owned companies in other emirates outside Abu Dhabi.